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    Explained: Why investors are dumping Zomato, Nykaa, Paytm, CarTrade, PB Fintech

    Explained: Why investors are dumping Zomato, Nykaa, Paytm, CarTrade, PB Fintech

    Explained: Why investors are dumping Zomato, Nykaa, Paytm, CarTrade, PB Fintech
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    By Mangalam Maloo   IST (Published)

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    Stocks of new age business stocks in India are mirroring the trend on the Nasdaq, where investors have suddenly lost appetite for highly valued tech and platform companies.

    Stocks of Zomato, Nykaa, PB Fintech, Paytm, CarTrade and Fino Payments Bank—the flag bearers of new age business—are being hammered on Monday, with all these stocks touching their lowest levels since listing. Stocks like Paytm and CarTrade have more than halved from their issue prices, PB Tech and Fino are quoting their issue prices and Zomato is not far from breaching its issue price. Nykaa is the only stock which is still quoting significantly higher than its issue price.
    Why are these stocks falling?
    New age business stocks in India are mirroring the trend on the Nasdaq, where investors have suddenly lost appetite for highly valued tech and platform companies.
    Why the sudden tech aversion on Nasdaq?
    Because interest rates in the US are set to rise, with some investment banks like Goldman Sachs predicting that the Federal Reserve may hike rates more than four times this year alone.
    So what?
    This means that the yields on US Treasury bonds will increase, making it attractive for a section of investors.
    But how does that affect tech stocks more than the other sectors in the economy?
    You see, investors view tech stocks as ‘growth’ stocks, and expect their revenues to grow at rates much higher than the rest of the market. But investing in tech stocks is also much riskier compared to say, investing in stocks of more mature businesses. That is because, often the actual growth may be much lower than the lofty expectations that the market has from these growth stocks.
    So investors expect a certain rate of return to compensate for the risk they are taking on.
    How is that rate of return arrived at?
    This rate of return has to be at a certain level above the risk free rate of return than an investor can hope to earn without losing sleep. The risk free rate is the yield on government bonds. So say, if the risk free rate is 4 percent, then investors may expect 6 percentage points higher—10 percent—from their invest in tech stocks.
    What is the logic for this?
    Today’s Rs 100 is more valuable than the Rs 100 you will get in two years. This is all the more true when interest rates are rising. So when analysts assign a value to tech stocks based on their expected cash flows in future, the value of those cash flows will be lower if interest rates at that point are higher than what they are today. Lower the value of future cash flows, lower the valuation investors will be willing to pay for those stocks today.
    Is the time value of cash flows the only reason for the sell-off?
    To a large extent, yes. Because as mentioned above, investors expect a certain rate of return above the risk free rate. Just because the risk free rate of return rises (when interest rates go up), it does not follow that growth rates of tech companies will also rise proportionately. In fact, rising rates hurt vast sections of the economy and trigger a cutback in spending. Besides, tech companies’ cost of borrowing will also increase, hurting margins, and thereby earnings. When earnings shrink, the price to earnings multiple that investors were earlier willing to pay for these stocks, also reduces, causing the stock prices to fall.
    What about the stocks in India?
    A majority of the new age businesses in India were riding high on the upbeat mood in the market. Most of them are not yet making profits and are not expected to report meaningful profits any time soon as to justify their sky high valuations. Now that market sentiment has changed for the worse, investors are panicking and heading for the exit before the share prices fall further.
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