Fractal Analytics nearly halves IPO size as valuation leaves PEs unhappy

Enterprise AI firm Fractal Analytics Ltd has trimmed the size of its public issue after its investors, including private equity majors Apax Partners and TPG Capital, decided to sell a smaller stake due to a lower-than-expected valuation amid uncertain market conditions, two people close to the development told Mint. The AI unicorn now plans to raise ₹2,834 crore, 42% less than the planned ₹4,900 crore, its red herring prospectus filed on 2 February showed. The Mumbai- and New York City-headquartered firm is likely to announce the price band on 4 February, which can value it at around ₹18,000 crore, or about $2 billion, one of the people said. This valuation is significantly lower than what investors were first told when the initial public offering (IPO) pitch was being finalized with merchant banks, the second person added. This will also be lower than the $2.44 billion valuation the company fetched in its last fundraise, in which it raised $170 million from investors including Trust Investment Advisors, White Oak Capital Management, Gaja Capital, and Neo Asset Management. The offer will open for bidding on 9 February for retail investors and close on 11 February, according to the RHP. The IPO was originally planned to be launched in December, which was then shifted to January, before a February date was finalized as bankers were waiting for the right time, the people said, on the condition of anonymity. Mint's emailed queries to Fractal Analytics, Apax, and TPG remained unanswered. New target The IPO now has a fresh issue size of up to ₹1,024 crore, a 20% reduction from the draft papers. The offer-for-sale component has been halved to a maximum of ₹1,810 crore. Other than Apax and TPG, selling shareholders include Satya Kumari Remala, Rao Venkateswara Remala, and GLM Family Trust. Apax will be offloading shares worth ₹880 crore as opposed to its earlier stake sale size of ₹1,463 crore. TPG, meanwhile, slashed its OFS size by 78% from ₹2,000 crore to ₹450 crore, the RHP showed. The company has also not raised any pre-IPO funds, despite weighing a ₹256-crore round. Of the ₹1,024 crore the company plans to raise through the fresh issue, ₹265 crore has been earmarked for investment in its subsidiary, Fractal USA, and for debt repayment. From the remaining amount, ₹355 crore will be used for research and development and for the sales of Fractal Alpha, which enables the incubation of new businesses and the integration of acquired businesses. In addition, ₹57 crore will be used to purchase laptops, and ₹121 crore to set up new offices in India. The use of IPO proceeds has remained unchanged from the draft papers. This means that the remaining unallocated amount, originally intended for funding inorganic growth and general corporate purposes, will decrease from ₹475 crore to ₹225 crore. Over the last three years, Fractal has raised ₹75.2 crore, primarily through the issuance of equity via employee stock ownership plans (Esops). Ahead of the filing of draft papers, Apax sold 1,541 shares to Janaki Akella, an independent director at the company, for ₹5,550 apiece. Subsequently, a bonus issue of four shares for every one share held adjusted the price of every share to ₹1,110. Between the filing of the DRHP and the RHP, the company allotted shares to employees under its Esops and time-based monthly income plans. Other than this, on 23 January, Apax was allotted 16.6 million shares upon conversion of its compulsorily convertible preference shares (CCPSs), while TPG was allotted 5.93 million shares upon conversion of its CCPSs. Fractal's IPO comes hot on the heels of an India-US trade deal, even as broader discourse on AI bubble concerns has taken centre stage. While experts worldwide debate whether AI is overvalued, there is still hope that India can outperform its global peers if the AI bubble bursts.