Risky markets, wary buyers pressure tech startups to reconsider IPO plans

Indian equity markets had a dream ride in 2021, with 63 companies going public and raising Rs1.19 lakh crore. Among them, One 97 Communications, the parent company of the fintech major Paytm, made the biggest buzz, raising Rs18,300 crore in November 2021 and overtaking state-run miner Coal India’s Rs15,199 crore IPO in 2010 as India’s biggest.

Eight other tech startups also went public last year—beauty products e-tailer Nykaa (FSN Ecommerce), food aggregator Zomato, gaming company Nazara Technologies, travel technology company RateGain, travel platform EaseMyTrip, insurance aggregator PolicyBazaar (PB Fintech), online automotive portal CarTrade Tech and MapMyIndia (CE Infosystems). Amid an equity market euphoria fueled by easy money policies of global central banks in the wake of the pandemic, investors lapped up the shares of these new-age companies. The issue of Nazara Tech, for instance, was subscribed as much as 175 times, EaseMyTrip 159 times and Nykaa 82 times.

Some of them went on to touch new highs post listing. Nazara Tech share was worth Rs3,354.40 on October 11, 2021, a three-fold gain over its issue price. Nykaa and Zomato more than doubled.

The fortunes, however, seem to have reversed in 2022. Paytm, which had set an issue price of Rs2,150, closed at Rs661.85 on April 18—a 69 per cent slump in five months. CarTrade Tech was down 61 per cent since listing, PB Fintech was down 21 per cent and RateGain had fallen 10 per cent from its issue price.

Even those shares that hit prices higher than the issue price have seen sharp corrections. Nazaara Tech, for instance, is down 52 per cent from its peak. Zomato is down 51 per cent from its life high, PolicyBazaar has declined 47 per cent and Nykaa 29 per cent. These corrections, however, are in sync with the wider global tech stock sell-off this year.

If 2021 was a year in which cheap money sloshed around, 2022 began with central banks tightening the screws and mopping up the excess liquidity in the system, as inflation surged to multi-decade highs. The Russian invasion of Ukraine further spoiled the mood, and foreign institutional investors rushed out of emerging markets.

Experts, however, say the high valuations at the time of going public are equally responsible for the fall. “The India internet sector valuation commands a three times premium over global valuations, driven by its high-growth opportunity and penetration story,” said Amit Chandra of HDFC Securities.

It is, however, expected that eventually markets will react to earnings in the larger scheme of things. “Due to the kind of valuations or future expectations that were laid out at the time of listings, the investor psyche was to just get in. The realizations started seeing through once the [earnings] numbers started coming in,” said Mayuresh Joshi, head of equity research at the stock brokering firm William O’Neil.

Paytm is a case in point. The company started in 2009 as a platform for mobile phone recharges. Over the years it expanded into mobile wallet and today it is a super app of sorts offering everything from payments and ticket booking to shopping and digital lending. The expansion has helped drive its revenues up, but profits still remain elusive. In the nine months to December 31, 2021, Paytm’s revenue from operations surged 73 per cent, from Rs1,987 crore in the same period a year ago to Rs3,433 crore. At the same time, its loss widened 30 per cent, from Rs1,256.6 crore to Rs1,633.9 crore.

With the advent of the unified payments interface (UPI), which has made instant bank-to-bank transfer a breeze, Paytm’s mobile wallet service has become largely redundant. It also faces stiff competition in most segments it operates in. Zomato and PolicyBazaar, too, have been reporting losses despite revenue gains.

In the past few years, India’s digital ecosystem grew dramatically, especially during the pandemic. This also resulted in intense competition. Zomato, for instance, faces stiff competition from Swiggy in the food ordering business. It is expanding into quick commerce, a segment where competition is even fiercer and outlook uncertain. PolicyBazaar, which is well placed to benefit from the rising insurance penetration, faces competition from insurers that are also scaling up digital offerings as well as digital-first insurance companies like GoDigit.

Against this backdrop, consistency in earnings will be something investors will be closely watching out for. “A lot of these companies have to demonstrate their longevity and improve profitability,” said Kenneth Andrade, chief investment officer of Old Bridge Capital. “All of them have hit critical sizes as far as turnover is concerned. A lot of investors will be watching how they convert that opportunity and build sustainable future without external capital. Very few of them will come to the next level. We will have to give them time.”

In the past few months, as central banks have begun tightening the purse strings, foreign institutional investors have been pulling out of equity markets in emerging markets in droves. So far in 2022, FIIs have sold close to 01.08 lakh crore in Indian equity. With liquidity getting withdrawn and inflation surging, this is a testing time for companies. “This is when better-rated companies who are able to tide over the cycles come into the picture and the others just fall by the wayside,” said Joshi.

While some startup stocks have bounced back, the recoveries have mostly been technical. “The markets will re-rate when valuations are cheap and earnings trajectory looks lucrative. But, when the earnings visibility looks choppy, at the same time valuations are on the lower side, then the outlook looks a little bit jarred,” said Joshi.

Amid last year’s euphoria, several companies like Delhivery, Mobikwik and PharmEasy had filed papers to go public. However, with easy money drying up and the market’s growing volatility—owing to geopolitical uncertainties and inflation worries—many of them have delayed their plans and are waiting for stability. In the first three months of 2022, there have been six IPOs that raised a total of Rs7,819.24 crore, says data from Prime Database. There were 16 IPOs in the first three months of 2021 that raised a cumulative Rs14,996 crore.

Investors seem cautious. “There is no dearth of money for good companies,” said Avinash Gorakshakar, director (research) at Profitmart Securities. “But, where valuations are very high and profits are uncertain, people are going to be cautious. I don’t think the ‘big money’ approach people had earlier will be there. Even private equity investors will think twice and will be a little skeptical.”

Against the backdrop of the slump in the share prices of some of the startup tech companies, the market regulator Securities and Exchange Board of India floated a consultation paper earlier this year, which proposed more transparency on the pricing of IPOs. The market regulator said the new-age companies should provide details on how the IPOs were being priced, compare it with pre-IPO fund raising and publish presentations to investors before the IPO.

Parameters like earnings per share and price-to-earnings ratio could not be applied to the new age companies, considering many of them are generally loss making.

“It is obvious that disclosures in ‘Basis of Issue Price’ section, particularly for a loss-making company, are required to be supplemented with non-traditional parameters like key performance indicators (KPIs) and disclosure of certain additional parameters such as valuation based on past transactions/fund raising by issuer company,” said the paper.

If these guidelines are accepted, then undoubtedly the process will become more transparent and investors will be able to make a more informed choice. At the same time, loss-making companies may not be able to garner high valuations and some may even find it difficult to go public.

TROUBLED MARKET

Many tech startups that were keen on IPOs have delayed their plans

delhivery
The logistics unicorn is planning to raise 15,000 crore through fresh issuance of shares and an offer for sale of Rs 2,460 crore. Got Sebi approval, but has delayed IPO.

PharmEasy
Received clearance from Sebi in February, but the IPO is likely to be delayed. It was planning a 16,250 crore issue.

Oyo Hotels and Homes
The hospitality unicorn is planning to raise 18,340 crore, but it might delay the IPO and reduce its issue size.

Mobikwik
The payments firm received Sebi’s approval in October 2021 for its 11,900 crore IPO, but the company is waiting for the market conditions to improve.

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