We have seen new-age companies getting listed in 2021, this was a first for the Indian stock markets, where these high-growth disruptors got listed. The initial 6 quarters were a nightmare for these companies and their investors as they saw drawdowns ranging from 30-70% from their listing price. I would say that there is a blessing in disguise for these companies as the funding winter kicked in right after these listings and these companies raised large equity capital and created cash buffers.
Now, we are seeing smaller companies finding fundraising challenging and consolidating, which is a positive for players like Paytm (One 97), Zomato, Nykaa, and PB Fintech which command a fairly large market share in their respective sectors. Cash balance and debt levels of One 97, Zomato and FSN E-commerce, and PB Fintech is well booted as they raised a sufficient amount of funds when the market was ripe. As tech adoption in India accelerates, these companies are equipped to exploit growth opportunities when needed because of the fundraising they had done at the right time.
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Many early employees who got huge value creation from selling their shares left the organization. If you look at many of these ex-co-founders and early employees, usually the ones who are able to create value for a startup in its initial phase is not able to add a similar kind of contribution to the company at the late stage. Considering that these companies are yet to mature into large-scale businesses, there will be a different pedigree of talent that these companies would require to take the baton forward. Hence, these companies are not at such a high loss by the exit of senior employees.
Despite what has happened since their IPO’s investors can adopt a different lens in analyzing these stocks given the veracity at which their stock prices have corrected. The food delivery business is extremely competitive with players trying to race to the top. The market is now consolidating with Amazon wrapping up its food delivery business. The news and associated events since these tech company’s listings have mostly been negative which reflects in the stock price we see today. The exit of many of their senior personnel, anchor investors like Alibaba and Softbank, and the correction in tech stocks across the globe have disparaged their share prices.
With the correction in the US 10-year yields, Nasdaq and loss-making tech firms have begun to bottom out in valuations. Similarly, these tech firms have begun to bottom out for now. At their current valuations given their moat, grip on the market, entry barriers, and inroads they have made, the share price seems well poised for growth. We are seeing a new set of FPIs and institutional investors entering the stock at these levels, and major institutions like Jefferies and Morgan Stanley initiating a ‘buy’. To attach numbers to the sentiments, in the case of Zomato, FPI shareholding has grown from 17.7% in August to 26.7% in September.
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Loss-making and negative cash flow generating business will eventually diminish from the markets, but if a company has a path towards profitability and growth it will eventually create wealth for long-term investors. Once such case – Amazon, it took several years to turn profitable, and those shareholders who were able to weather the volatility and wait out until it turned profitable created stupendous wealth.
Given the 55% market share Zomato commands as per a recent report, their valuation is $6.74 billion, while swingy is looking to achieve a valuation of $10 billion in the private markets. The higher market share in the case of the former will make the journey towards profitability relatively swift. The primary business of Zomato which is food delivery turned profitable last quarter and we can expect a robust trend moving forward. Zomato’s business verticals – Food Delivery, Hyperpure, and Quick commerce business are growing and are on the path toward profitability. The management commentary on no further acquisitions and reaching breakeven levels on a company level within the next 2-4 quarters provides us with a certain level of conviction. Policy Bazaar, another new-age tech disruptor that was listed recently has a market share of 90% in its domain.
Even though Paytm’s UPI market share is inferior to Google Pay and PhonePe, the cross-selling done by Paytm from loans to tickets will foster their margins and help them clock profits in a couple of years. RBI’s market ceiling mandate that is to be enforced in 2024 will also provide impetus to Paytm’s market position. Global food delivery players like Doordash and Just Eat are trading at lower price-to-sales multiples but the growth and profitability of these companies are miles apart. Zomato has access to the world’s fastest-growing consumer market.
Similarly, compared to Loreal or Ulta Beauty in the international markets, Nykaa deserves to trade at a significant premium given the scope the Indian market provides. Goosehead Insurance which is a comparable peer for Policy Bazaar in international markets trade at 50% of the valuation – from a price/sales perspective. After factoring in the market share Policy Bazaar holds and the immense growth opportunities, the pragmatism of comparability fades.
In a nutshell, after this huge fall in these new-age companies post-listing, there is a blessing in disguise as we are seeing comforts on valuations, large institutional investors turning positive at these levels, competition consolidating, early signs of a path to profitability for core businesses being visible, US Nasdaq has bottomed for now, selling pressure from anchor lock-ins is out, worse around senior employee exits is factored, these companies have proven track with a strong balance sheet and are not focussed on profitability. Although Indian markets are still evolving on these new-age companies, very high-risk investors, having long investment horizons can consider investing or holding these new-age companies at these levels.
