There is a growing unease among seasoned public market investors about the presumably lofty valuations of many new-age businesses coming to the market to raise funds. What’s more disconcerting in many cases, is that the sums raised are being used to provide “exits” to existing investors, who are selling out with heady gains.
Is there much more on the table, especially in the short run? That’s the question that’s nagging most investors. What’s more, several veterans have publicly expressed to sit it out and give many of the new age offers a pass. That’s even more disconcerting.
Recent quarterly reports by digital world leaders like Zomato have also left investors with mixed views. While the food delivery major reported a robust over 30 percent quarter-on-quarter growth in users and a strong growth in the gross market value of sales via its platform, margins crimped by 67 percent and operating losses swelled. Zomato also said it will invest $1 billion in startups in the quick commerce space over the next two years. The company’s CEO and CFO in their message topped the communication with this: "One last thing – we have heard that a public listing changes a number of things for companies. We are adamant that we will not let our IPO change anything, and we aren’t going to morph into a QSQT business (‘quarter-se-quarter-tak’). We will continue to focus relentlessly on the long term”. That sounds like a clear message that turning profitable in the short run clearly isn’t a priority. What’s more, there are likely compulsions on this front with its biggest rival Swiggy still raising big money from the private market, which isn’t near-term bottomline focused.
Paytm, a big test of confidence
The Paytm IPO, India’s largest, pulled through convincingly in the final lap of its offer period. However, the listing outcome of this top-rated fintech player is being closely watched for cues to the street’s confidence in the new-age businesses. A strong listing would bring back some investor confidence and provide the upcoming new age IPOs a leg up. But a failure to deliver gains on listing day could very well have the opposite effect.
It remains to be seen whether an adverse listing will severely impact investor interest, or whether it will just make investors more selective. This since Nykaa has delivered a heady return.
What’s definite, though, is that there will be an impact on the perception of how successful or not the Paytm listing is. Given that optically, Paytm’s valuations as indicated by the offer price are lofty, it makes for an interesting case study.
To give you a sense, Paytm’s proposed market cap is 14.7x its pre-money Balance Sheet size and 50x its total operating income (not profit, mind you). Even on a post-money Balance Sheet size, the multiple would work out to 7.9x. In contrast, HDFC Bank and ICICI Bank trade at the market cap to net profit and net worth multiples of 28x and 30x, and 4.2x and 3.5x.
|Paytm||Amount (Rs cr)||Mcap Ratio (x)|
|Op Income (FY21)||2802.4||49.7|
|HDFC Bank||Amount (Rs cr)||Mcap Ratio (x)|
|Op Income (FY21)||128552||6.9|
|ICICI Bank||Amount (Rs cr)||Mcap Ratio (x)|
|Op Income (FY21)||89163||6.09|
And this should be seen in the context of the fact that nearly 60 percent of its operating income goes towards meeting payment processing charges (paid to banks to facilitate the transactions).
|BANKING ON PAYTM|
|Paytm Operating Metric||Q1-FY22||Q1-FY21||FY21|
|Payment Processing Charges||526.5||398||1917|
|PPC/Op Income (%)||59.1||72.2||68.4|
History in the making?
What can a significant debacle of a new age company listing have on the prospects of peers? We only need to draw lessons from history to realize this. During the dotcom boom, the Nasdaq Index had quoted at a PE multiple of 200. This was at a time when the PEG (price-earnings growth) ratio had become a popular yardstick. In essence, if you expected a business to grow at 100 percent year-on-year, a PE multiple of 100 was ascribed. Why this was clearly absurd, we all know and realize now.
The story of today's unicorn valuations doesn't seem very different. A walk down memory lane clearly suggests that what seemed to inspire confidence then is similar to what inspires confidence now. If Warren Buffett's Berkshire Hathaway has invested in Paytm now, Rupert Murdoch bought Indya.com from Microland then. Where is Indya.com, touted to be the future platform for all advertising, today?
Similarly, Sify.com which had seen its American Depository Receipt hit $60 on Nasdaq in 2000, today trades at about $3.5. Even rediff.com that traded above $10 during the boom, had the last quote of $0.12.
Some of these businesses have evolved, survived the bust and grown. But none of them command the lofty valuations once did. Will we see a repeat of this, or are the new-age companies different, and will they go on to create wealth like Facebook and Alphabet or even Tesla? That’s a trillion-dollar question to which there are no easy answers. What’s, a given, though, is that if the public market appetite for new age listings gets dented, it will ripple through the private investment environment for startups. If the public market won't give the current valuations on exits, it is unlikely the private market will either.
Given this, the repercussions of a public market failure could well reshape the fortunes of the start-up ecosystem in the country. And that would be a much bigger impact than the success or failure of any one public offering. And for this reason, I’d watch the space very closely.