In the wake of an IPO boom from the startup space with PayTM, Zomato, PolicyBazaar among many making a beeline for their deal street debut, often known as Warren Buffet of India, Rakesh Jhunjhunwala is of the view that start-up valuations are "extremely expensive".
Jhunjhunwala said, "If we are anticipating too much of change, value will take place, it will also take time. And we are paying absurd valuations."
Global direct listing: a missed opportunity?
Many Indian Unicorns harboured the dream of listing overseas after the government's announcements on global direct listing. With lack of movement on the final guidelines, the wait has got longer for these tech companies who want to capture the liquidity window available in the equity markets.
For many, global listing could have been a priority as the US market provides the depth and the investor base which will assign rich valuations to these new age companies, but it needs to be seen if the Indian markets can offer similar valuations.
The valuation game
An advisor on many such IPO processes shared on condition of anonymity, "A new trend is emerging to maximise valuations, pre-IPO rounds see small equity sale at much higher valuations and the IPO valuation is benchmarked on that basis."
Market regulator, SEBI, recently proposed to reduce the lock-in period for investors post the IPO from one year to six months. Could this put a risk on the retail investors who take a bet on the company based on the valuations set by these investors who can exit in a shorter time if SEBI notifies these changes?
Axis Capital's Salil Pitale said, "I think not really, six months is a long time for any overhang to go away. Business cycles have become shorter and investment cycle has become shorter."
Startup and tech-based new age companies have seen shorter investment cycle indeed. In the fast changing world during the pandemic which has given an added fillip to tech-based companies, these investment cycles have become shorter.
Private capital in private companies have different rules, can the same apply when a company is getting listed? Proxy advisory firm IIAS's Amit Tandon said, "If we have a more robust book build process there will be better price discovery and genuine value mechanism."
Profitability is key
Indian equity markets are evolving fast, flush of liquidity from diversified group of investors has made it more robust, along with the guidelines by the market regulator to be at par with global standards. While the traditional investors who essentially back cash making asset-based companies, the digital world could appeal to them if companies turn profitable.
A source suggested, "Most of the companies from the startup space are aware of this and are timing their IPO when they turn profitable."
Jhunjhunwala added, "The only money that I ever been injected in Nazara was $5 million, when it had $15 million of cash. So there I feel safer. I wouldn't mind investing in all these companies if I found the valuation to be effective."
As an investment mantra, the ace investor pointed out, "Valuation is the slave of earnings."