Green shoots of profitability finally emerging among Startups in India

After a prolonged period of hyper-growth at the cost of high cash burn and losses, Indian startups finally seem to be turning over a new leaf. Many companies such as Zomato, Meesho, and MobiKwik have now turned profitable while others like Paytm, Delhivery, and Zepto have showcased a clear path to profitability.

The impact of this is also evident in investor returns in the public domain. On Tuesday, Japanese investor Softbank reported that its returns from The Japanese investment giant saw its gain from some of its Indian bets giving it $400 million in the quarter ended June 30, 2023.

“The heightened investor scrutiny, especially during the recent funding slowdown, has finally pushed companies to prioritize their margins,” said Anirudh A Damani, Managing Partner, Artha Venture Fund – an Early-stage micro-VC fund. “Ensuring a business model that offers genuine value while maintaining profitability isn’t just ideal, it is imperative,” he said.

Fintech unicorn (company valued over $1 billion) MobiKwik became the latest entrant into the profitability club, posting a consolidated profit for the first time at Rs 3 crore in the first quarter (Q1) of financial year 2023-24 (FY24). This was, however, the second time in a row that it reported positive adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) at Rs 13.6 crore in Q1, a 181 per cent year-on-year (y-o-y) increase.  

The company's revenue during the quarter grew 68 per cent to Rs 177 crore compared to the corresponding quarter in the last fiscal year.

"In FY 2022-23, we achieved all the major goals we set for MobiKwik the previous year, and our vision for FY 2023-24 is to achieve profitability in all quarters," said Bipin Preet Singh, co-founder and chief executive officer (CEO), MobiKwik.

This came a day after e-commerce marketplace Meesho announced that it also turned profitable for the first time ever at a consolidated profit after tax (PAT) level in July. The firm’s chief financial officer Dhiresh Bansal attributed this to a rise in the company's order volumes and revenue, aside from retrenchments undertaken by the company.

While the company did not disclose the actual PAT figures, it said the numbers were in 'single digits', indicating that the PAT was under Rs 10 crore. 

Food delivery giant Zomato reported a similar Q1 performance, generating its maiden profit at Rs 2 crore in consolidated PAT during the quarter, compared to a loss of Rs 186 crore in the year-ago period. The company's revenue from operations grew 71 per cent y-o-y to Rs 2,416 crore in Q1FY24, up from Rs 1,414 crore in the corresponding period a year ago.

“We expect our business to remain profitable going forward and knowing what we know today, we believe we will continue to deliver over 40 per cent y-o-y topline (adjusted revenue) growth for at least the next couple of years,” said Akshant Goyal, Chief Financial Officer, Zomato, in a regulatory filing.

Zomato's rival Swiggy's food delivery business turned profitable in the March quarter of FY23 (Q4 FY23) after considering corporate costs and excluding employee stock options (ESOP). The company's monthly cash burn reportedly came down to $20 million from about $45-50 million that it was losing each month during its peak in 2021.

An initial funding boom in 2021, when the Indian startup world saw a record-breaking influx of funding, saw many nascent companies, flush with cash, expand their operations in anticipation of growth. This led to companies burning cash at an unprecedented rate as the “influx of capital outpaced the real-time supply dynamics.”

The year 2021 saw investments to the tune of $43.6 billion. This somewhat continued into the next year which brought in total funding worth $27 billion, according to market intelligence platform Tracxn. The second half of 2022, however, saw the so-called funding winter rear its head when investors and founders alike shifted focus towards unit economics and improving margins.

“Terming startups turning profitable as a rare occurrence is a misconstrued perspective…What we witnessed earlier – startups relying heavily on consecutive fundraising rather than generating revenue from customers – was the anomaly,” Damani said, adding, “In essence, the days of easy capital are behind us. Founders must adapt to this evolving investment landscape.”

While several budding companies have managed to breach the profitability threshold, many others are on the cusp. Large firms like payments major Paytm, logistics provider Delhivery, and quick commerce startup Zepto have, of late, been able to put a leash on their expenses and have profitability in their sights.

Paytm, the only listed payments fintech in India, in its first quarter results this year, announced that its revenue from operations jumped 39 per cent y-o-y  to Rs 2,342 crore. Moreover, the fintech trimmed its losses by 44.5 per cent y-o-y to Rs 358.4 crore.

Vijay Shekhar Sharma, CEO of the payments major, had last year stated that the company would achieve EBITDA break-even by September 2023. “Importantly, we are going to achieve this without compromising any of our growth plans,” Sharma had said back in April. In its latest earnings call, the CEO added that Paytm is on track to become free cash flow positive by the year-end.

Its listed contemporary Delhivery, a unicorn in the logistics sector, also narrowed its losses significantly in the quarter ended June 2023, both on a y-o-y basis and sequentially.

Its consolidated net loss slimmed to Rs 89.5 crore in the quarter, from Rs 399 crore a year ago, and Rs 159 crore a quarter ago. Consolidated revenue from operations, on the other hand, increased 10.5 per cent y-o-y to Rs 1,929 crore.

After breaking even in the March quarter, Delhivery reported a small loss at the operating profit level in the June quarter. The company is expected to turn profitable at the net level by the end of FY24. 

Sectors of high cash burn, like quick commerce, are also seeing companies showcasing definitive paths to profitability. Mumbai-based Zepto is another firm that is on track to turn profitable in the next year or so.

In a recent interview with Business Standard, Zepto's co-founder and CEO Aadit Palicha said that he expects the company to become cashflow positive in the next 12-15 months. The company has seen a 300 per cent y-o-y growth in sales this year. Its dark stores, contributing to over half of its business, are profitable.

Much like SVF, investors, across stages, are now likely to loosen their purse strings as more and more fledgling firms turn a profit.

“In the foreseeable future, I firmly believe more companies will embrace the pursuit of profitability. Founders should be laser-focused on winning customers, ramping up revenues, and achieving profitable outcomes. When they do, they’ll find investors naturally gravitating toward them,” said Damani.