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South And Southeast Asia Unicorns: A New Credit Story Post-IPO

South and Southeast Asian unicorns don't take the IPO money and run. These tech startups are more likely to engage in cash conservation than cash burn after they lose their horns--i.e., go public. S&P Global Ratings believes more former unicorns in the region will be profitable in the next two years.

Nonetheless, our study of former unicorns also shows that profits and cash flow can quickly change direction. This is given inherent risks in tech sectors, which attract more new competitors relative to old industries, and have greater regulatory risk.

Once former unicorns' profitability and cash flows become sustainable, we expect they will shift focus toward sustainable leverage. That was the case with U.S.-based Uber Technologies Inc. (BB+/Positive/--). Multiple rating upgrades on Uber over the past two years illuminate the potential path our rated startups in this region may take.

The Sample

Our report draws on data from nine publicly listed former unicorns across South and Southeast Asia and one unlisted startup. All of them operate in disruptive tech-based industries, with at least three years of public financial statements.

Table 1

The sample: 10 tech startups in South and Southeast Asia
Company Year of IPO Market cap (Mil. US$) Country Industry niche
Delhivery Ltd. 2022 3,972​ India Logistics
Freshworks Inc. 2021 4,109​ India IT services
FSN E-commerce Ventures Ltd. (NYKAA) 2021 5,849​ India E-commerce
Grab Holdings Ltd. 2021 14,004​ Singapore Ride-hailing, food delivery, digital financial services
One97 Communications Ltd. (PAYTM) 2021 2,653 India Digital financial services
Bukalapak.com Tbk. PT 2021 782​ Indonesia E-commerce
GoTo Gojek Tokopedia Tbk. PT 2022 4,338​ Indonesia Ride-hailing, e-commerce
Sea Ltd. 2017 38,056​ Singapore Digital entertainment, e-commerce, digital financial services
Zomato Ltd. 2021 19,890​ India Food delivery
ANI Technologies Private Ltd. N/A N/A India Ride-hailing
Market prices as of May 15, 2024. N/A--Not applicable. Source: S&P Global Ratings.

Among the listed companies, we rate Singapore-based mobility, delivery and financial services platform provider Grab Holdings Ltd. (B+/Stable/--). We also rate India-based mobility services unicorn ANI Technologies Pte. Ltd. (ANI Tech, B-/Stable/--), which is likely to pursue an IPO in the future.

Our analysis is based on financial statements (interim and annual reports), company news, and investor presentations since 2019. Our credit observations on individual entities are derived from publicly available information.

With Greater Scrutiny, Comes Greater Profit Focus

We expect more companies to turn profitable over the next 24 months. Sustainable profitability is paramount for these startups, especially with the greater transparency, disclosures and scrutiny following their IPOs. So far, four of our sample companies have turned EBITDA-positive in their latest financial year, including pre-listed ANI Technologies. This is up from just one three years ago: FSN E-Commerce.

Table 2

Cost-cutting and investment discipline have been key to positive earnings…
…for the profitable unicorns in our study
Company Calendar-year of first reported profits Calendar year of IPO Steps taken to reach profitability
FSN E-commerce Ventures Ltd. 2019 or prior 2021 Not applicable.
Sea Ltd. 2022 2017 Exit from unprofitable markets;
No salary for executives, plus layoffs.
ANI Tech 2022 Pre-IPO. Exit from non-core business segments such as food delivery, vehicle commerce, and auto retail;
Cost rationalization across technology and support functions.
Freshworks Inc. 2023 2021 Layoffs.
Sources: Company disclosures, S&P Global Ratings.

We believe Grab is at an inflection point, having turned in at least two consecutive quarters of positive EBITDA. Rising revenues combined with better cost efficiency will sustain the path to profitability. The company reduced its workforce and adopted artificial intelligence for areas such as customer service. Grab also cut down on incentives provided to consumers and partners, which it had previously used to gain market share.

In our view, Grab's cash-burn stage is now over. The company's take rate (revenue as a proportion of gross merchandise value) steadily rose to 11.2% in 2023, up from 3.8% in 2020. In our opinion, Grab's entrenched market positions and rising consumer loyalty have boosted this measure. We forecast Grab's take rate will continue rising, though at a slower rate, to be 12%-13% by 2025.

Chart 1

image

Profitability Isn't Always Linear

Profitability can be difficult to sustain.  At the nascent stage of profitability, profit levels and cash flow generation are low and vulnerable to market risks. Incumbents may need to revert to cash burn and losses to defend market share in the face of new or intensified competition. Evolving regulations often faced by tech-based disruptors add another layer of uncertainty.

Among our sample, India logistics firm Delhivery fell back into negative EBITDA territory in fiscal 2023 after just one year in the black (the fiscal year ended March 31, 2023, depicted as 2022 in chart 2 below). The decline was due to a thin EBITDA margin and a rise in freight, handling and servicing costs arising from network integration challenges between Delhivery and a company it acquired.

Another example of backsliding is Zomato. Its EBITDA losses widened in fiscal 2022 (year ended March 31, 2022, depicted as 2021 in chart 2 below). This was in part due to increased investments to drive customer acquisition and retention.

Chart 2

image

This phenomenon for tech-based unicorns is also seen elsewhere. For Uber, EBITDA losses widened to US$3.3 billion in 2019, from US$1.9 billion in 2018, due to elevated incentive spend to defend market share and investments in its non-ride segments.

In our view, startups with leaner cost structures are better positioned to overcome flare-ups in competition and regulatory pressure. We expect cost control to become an increasingly important factor to drive profitability and earnings growth. This is as revenue growth inevitably slows from the high rates recorded in the earlier years of the entities' existence when penetration remained low and incentives were aplenty.

Chart 3

image

The Region's Favorable Demographics Are A Draw

The region's tech startups benefit from a large potential target market, combined with strong economic prospects and a growing middle class.  GDP momentum in India, Indonesia, Philippines and Vietnam is decidedly faster than elsewhere in Asia and the world.

Chart 4

image

We also expect spending power to improve as more people join the workforce than leave it. Southeast Asia's working population is set to grow at a compounded average growth rate of 0.7% between 2023 and 2028, while India's CAGR is at 1.1%. This compares with a range of -0.5% to 0.1% for the EU, U.S. and China, according to the e-Conomy SEA 2023 jointly produced by Temasek, Google, and Bain & Co.

These characteristics can draw in new players even after incumbent unicorns become increasingly entrenched following public listings and market consolidation. For example, despite Grab having over 90% market share in the Philippines, new contenders still entered the market in 2024, including U.S.-incorporated ride-hailing platform inDrive. A unit of Vietnam's conglomerate Vingroup Joint Stock Co. also recently expressed interest in entering the Philippines' ride-hailing market, according to Philippine authorities.

Cash Is King for Early-Stage Companies

The unicorns in our sample hold cash to meet contingencies. Cash holdings are an important credit factor for both former and current unicorns, because they act as a bridge to sustainable operations.

These players often maintain additional capital to deal with business and regulatory challenges in nascent, fast-growing industries. Such buffers can help them make timely investments to defend market share and keep growing. Or to address evolving regulatory risk especially given the non-linearity in cash flow burdens.

Firms in our data set maintained buffers to cover about two to eight years of cash burn. Even with breakeven in sight, players such as Sea and Grab still had about three to five years of cash buffer at the end of 2022 (see chart 5).

Chart 5

image

Cash balances support liquidity of unicorns.  This is especially true when firms are not yet past their cash-burn stage and continue to carry some leverage in the form of term loans, short-term working capital borrowings from banks or hybrid debt securities. This is the case for Grab and ANI Tech. Even before recent profits, they had neutral liquidity assessments, supported by their cash balances sufficient to cover anticipated cash burn and upcoming debt maturities. As startups turn profitable, we see liquidity cushion further strengthening.

We believe former unicorns have access to more diversified funding sources compared with pre-IPO players such as ANI Tech that are yet able to tap the equity markets. Still, these funding markets might not be always accessible. For example, share prices of former unicorns in our sample declined as much as 70% since listing.

The share-price volatility in our view reflects the high investor expectations on earnings. We believe a subsequent round of fund raising could be challenging until the former unicorns prove their worth. While some players such as Sea and Zomato have emerged from the lows, over two-thirds of the sample set continues to be below their debut listing price.

Chart 6

image

Financial Policy Will Become An Important Credit Consideration

Shareholder returns become part of the equation.  As former unicorns stick to the path of positive profits and cash flows, shareholders' expectations on returns may increase. That said, we do not foresee unicorns becoming aggressive on shareholder payouts yet. Rather, we see most players prioritizing reinvesting cash flows in business and growth while maintaining their solid cash position.

Firms such as Zomato, Sea and Freshworks do not intend to pay any dividends for now and remain focused on business investments. However, there is also an emerging subset of players such as Grab and Goto Gojek that have announced share repurchase programs. In our view, this gives them the flexibility to prioritize business investments when needed but also enhance shareholder value. In March 2024, Grab spent about US$97 million under its US$500 million share repurchase program.

Leverage will come under scrutiny.  Traditional credit metrics and leverage tolerance become relevant rating factors once companies are past their cash-burn stage. We believe the pace of deleveraging of unicorns will be driven by their ability to grow earnings consistently. For example, we upgraded Uber in March 2024, partly on our view that its debt-to-EBITDA ratio will fall to 1.2x this year, from 2.1x in 2023. We also expect less volatility in metrics such as free operating cash flow to debt, which we forecast at 40% this year versus as low as 0% a few years back.

Typically, unicorns have limited debt liabilities, post IPO. For our SSEA unicorns, we do not foresee debt levels spiking as more unicorns turn profitable. The aggregate debt outstanding in our sample set was less than US$6 billion as on Dec. 31, 2023, compared with over US$13.5 billion in 2020 when most of the entities were unlisted (except Sea) and had raised debt to shore up cash.

Against this, aggregate cash holdings of our set exceeded US$17 billion at the end of 2023 compared with about US$12 billion in 2020. Players such as ANI Tech and Grab have also reduced their debt over the last year through partial repayment of outstanding term loans to reduce interest costs and negative carry on their funds in a high interest rate environment.

Chart 7

image

Older Unicorns Show A Way Forward

The cash rewards from IPOs alone are not what leads to improving credit quality.  Take the cases of Uber and Tesla. Though not yet at breakeven, they were able to garner high valuations (especially Uber), resulting in large cash proceeds. Uber's net IPO proceeds amounted to US$7.9 billion, providing a sizable cash buffer.

Although Tesla's IPO proceeds of US$226 million was nowhere near Uber's, the carmaker raised about US$1.4 billion through a sale of convertible notes and subsequently issued about US$1.4 billion of senior unsecured notes, with an intention to solidify liquidity.

Chart 8

image

Still an improvement in credit ratings hinged on their ability to generate positive EBITDA and cash flow.  For Uber, achieving profitability was no cruise. The current stability followed after some drastic measures to return management's focus to the core business. These measures included multiple divestitures (Uber Eats India, autonomous driving unit, etc.).

Chart 9

image

The path to sustainable profitability and corresponding rating improvement has been well trodden. We believe unicorns in this region are following in the footsteps of companies such as Uber, Tesla, and Netflix. Like these former unicorns, our sample SSEA cases also reduced cash burn post-IPO, amid mounting investor scrutiny. Grab and Sea recently exited from several non-core businesses as part of management's efforts to become profitable along with sufficient liquidity cushion.

For our rated names, further rating upward momentum will mainly depend on a continued push to sustainable profitability and cash flow. We list our key watchpoints on the upside and downside below:

Table 3

Our upside and downside watchpoints for Grab and ANI Technologies.
Grab Holdings Ltd. (B+/Stable/--) ANI Technologies Private Ltd. (B-/Stable/--)
Key upside watchpoints Continued track record of positive EBITDA and operating cash flow while maintaining ample liquidity and a conservative balance sheet. Improvement of operating performance--e.g., recurring active users, higher average transaction values, lower merchant and driver incentives.
Permanent improvement in capital structure, improved currency-risk management, and ample liquidity, with EBITDA interest coverage well above 2.5x.
Key downside watchpoints Inability to reach sustainable positive EBITDA and operating cash flow. Weakening cash buffers without plans to raise more capital if path to profitability is delayed.
Weakening liquidity buffer.
Leverage tolerance that is higher than our expectations.
Source: S&P Global Ratings.

Credit quality improves when companies are able to generate robust growth amid sustainable cash flows and capital structure. This remains the core of the credit story of unicorns, before or after listing.

Editor: Cathy Holcombe

Digital design: Evy Cheung

Related Research

This report does not constitute a rating action.

Primary Credit Analysts:Shruti Zatakia, Singapore + 65 6216 1094;
shruti.zatakia@spglobal.com
Yijing Ng, Singapore (65) 6216-1170;
yijing.ng@spglobal.com
Secondary Contacts:Chi yang Leong, Singapore +65 62161099;
chi.yang.leong@spglobal.com
Shawn Park, Singapore + 65 6216 1047;
shawn.park@spglobal.com

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