Once Bitten Twice Shy: New-Age Companies Second Coming Raises Doubts

Right after the devastating second-wave Covid pandemic, the new normal looked permanent, and the world was still working on digital mode. That's when five new-age companies went public — Zomato Ltd., CarTrade Tech Ltd., Nykaa, Policybazaar and Paytm. It was a story of spikes, falls of wealth destruction and some resurrection. As another page gets added into the tech initial public offering history of India with Ola Electric and Swiggy, experts advise investors to exercise caution.

Many of the investors of the first phase have burnt their hands as three of the five listed digital stocks are trading below their issue price. Once again, investors will have to take a leap of faith.

Ola Electric is looking to raise Rs 5,500 crore via an IPO. It started operations in 2021 and has been posting losses for the last three years, with financial year 2024 losses before tax at Rs 1,472 crore. Swiggy is looking to raise Rs 10,414 crore. It has filed its IPO papers confidentially, but its fiscal 2023 losses were at Rs 4,179 crore.

"The upcoming IPOs might be swept up in the euphoria and receive good subscriptions. However, inflated valuations will have discerning long-term investors weighing the risks and rewards of this investment as the cost of capital has increased massively since 2021," Anirudh A Damani, managing partner at Artha Venture Fund, said.

"Investors need a higher ROI to shift from a safe haven asset to equity. Therefore, they will be closely watching if the business can deliver a return on capital employed that exceeds their return-on-investment expectations," Damani said.

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Long Road To Profitability

A few startups like Zomato and PB Fintech Ltd. have swung to profits and in the course of the journey, generated value to investors. Most other unlisted startups, too, pivoted to profitability, moving away from cash burn. Experts argue that even as a few startups toed the profit line, they are posting feeble profits, which cannot make up for their sky-high valuations.

"It's not easy for digital businesses to make money. Their business models are such. Uber has been around for 13 years and just made a profit. Lyft hasn't made a profit. Even if digital businesses turn a profit, at a 4–5% profit margin, it's to be seen if they can deliver value," Anurag Singh, a US-based hedge fund manager at Ansid Capital, said.

Many new-age businesses in India look like they have cleaned up acts by tightening belts, exiting markets like Swiggy, or cut down employee costs like Udaan. But investors, especially those who are eyeing more than listing-day gains, might need more before they take a bite, the second time around.

"Nothing has fundamentally changed, as they are cooking a new story by changing the flavour of the old story," surmises Singh.

Damani also emphasises the need for patience in investing, particularly when looking at the learnings from developed western markets where digital businesses like Facebook have generated value over the long term.

"Investors must be patient, keep an eye on the quarterly performance, read the management commentary after the results, and be vigilant on how the business model plays out. Just like one saw in Nvidia, when such businesses achieve scale, they can generate incredible returns, but this investment is not for the passive-minded," he adds.

Fall of the Mighty

The narrative around startups has changed massively since the first round of the IPOs came in 2021. Public market investors wanted to be a part of India's startup growth story. Startup VC and PE funding accounted for a massive $35.2 billion in 2021 growing almost three times from $10.9 billion in 2020, according to a PwC report. Since 2022, however, a funding winter has set in, and a lot of skeletons came up after funds dried up.

GoMechanic had to be acquired after its founder admitted to financial misreporting. Byju's valuations nosedived from $22 billion to zero, as per one of its investors. Paytm came under regulatory scrutiny and its stock is now trading at a quarter of its issue price.

It comes as no surprise that even in 2023, which saw massive IPO fundraising by about 75 companies — only three belonged to new-age companies. Honasa Consumer Ltd., fintech Zaggle Prepaid Ocean Services Ltd. and Yatra.com, which went public in 2023, however, held on to their issue-price valuations amid a massive bull run in the stock markets. Many others like PharmEasy, Oyo, MobiKwik and Udaan have chosen not to go ahead with their IPO plans.

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IPO-bound Vs IPO-ready

The success of Swiggy and Ola Electric in the public markets will chart another path — farther from their predecessors. More others might follow suit but with riders ahead. A report by consulting firm Redseer also says that India might have around 30 IPO-bound unicorns with revenues over Rs 500 crore and Ebitda-positive. Yet, they need to get IPO-ready and address issues concerning governance, and business models.

"Investors need time to understand the models… companies aren't engaging enough," the report says, adding that sharp pivots like acquisitions, online businesses going offline are the concerns they have around positioning.

Added to that, a lot of claims are made by management with artificial metrics like large niche total addressable markets. "Claims are based on a lot of vanity metrics... frivolous sometimes," the Redseer report adds.

The phase I of new-age IPOs have opened the eyes of investors on how different private markets are from public markets. The biggest casualty is the trust built around founders, the success stories and the celebrations around valuations. In stock markets where valuations change with the bat of an eyelid, startups will have to build a more solid foundation to withstand fluctuations and deliver growth.

Katya Naidu is a senior business journalist who writes about equity markets, startups, energy, infrastructure, real estate and healthcare.

Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.

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