Other internet companies are also planning their IPOs to take advantage of the hustle and bustle on the street. The pipeline of technology-related companies is robust and includes companies like Paytm, PolicyBazaar, Nykaa, and MobiKwik.
What explains the current exuberance in Internet IPOs? There are three main factors driving the excitement for these companies. Most obviously, global liquidity remains high and central banks remain accommodative in their monetary policies. Greater liquidity, greater risk tolerance and a growing number of investors willing to bet on loss-making companies. “Interest rates are low, so there is enough appetite for technology-related games IPOs in the market right now,” said Bhavin Shah, a former technology analyst and founder of Sameeksha Capital, a portfolio management services company.
Second, an increased FOMO (fear of missing out) factor plays a role. Hope grows forever that these Indian internet companies will eventually become success stories like Google, Facebook, and Netflix, and investors don’t want to miss out on that.
Third, the Chinese government is persecuting its tech businesses, and some of the incremental flows go to countries like India and Indonesia. “Although this is a relatively new phenomenon, it could be a structural shift,” said an analyst for a multinational brokerage firm, calling for anonymity.
But there are risks associated with these factors, which are driving the flood of investment. “Investors should note that tech company valuations are likely to correct themselves significantly once the Fed starts hike rates. At the moment everyone is just driving with the momentum, “said the analyst.
“People draw parallels with Google, Facebook, and Amazon, but note that these companies pretty much own all of their space and so the economics are different. You have to assess whether a tech company would be able to dominate its market or would have to share the space with one or more other players, ”said Shah.
In the past few years, the Indian market has risen through many hopeful trades. While earnings continued to disappoint, investors kept giving in to hopes that things will get better in the future. Internet stocks take hope trading to another level overall, as investors don’t even have to worry about inconvenient truths like losses or short-term cash burns. It’s about the great potential in the long run based on the growth of internet companies in China and the US.
“Although the market potential in India is huge, one has to be careful about drawing parallels with China, as India has not grown as fast as China with a similar per capita income and therefore it may take longer to reach the same milestone from Per Head income, “emphasizes Shah.
The other great hope that investors are driving has a name called “Adjacencies” or what some refer to as “Optionality”. “Optionality in relation to future use cases is a critical component of the Internet business model. Learning from global companies like Meituan suggests that one use case (e.g. food delivery, payments) can often be used as a hook for cross-selling / upselling other use cases / services. For example, almost 85% of first-time users use the Meituan app to check for food deliveries. Interestingly,> 50% of users who stayed on the platform for three years buy all of the top 5 services on the platform, “said ICICI Securities Ltd.
Zomato isn’t worth $ 10 billion in the eyes of some investors for the prospect of its grocery delivery business alone. These investors are also betting that it will offer other “neighboring” services such as groceries to its millions of users. Whether these adjacent services add value or burn more money is, of course, no reason to worry now.
“Ultimately, valuation is a function of discounting future cash flows for any company, and for many technology startups the transparency is too far into the future, sometimes even disclosing that these companies may never make a profit,” said Darshan Rathod. Co-Founder, Acumen M&A Advisors.
“From a cash flow valuation point of view, assumptions can be adjusted to justify everything. For example, what looks overvalued may look undervalued assuming all future growth will occur in 10 years instead of 20 years. This subtle thing is often overlooked in the highly acclaimed environment, “he adds.
While technology IPOs are in general exuberance, companies with better profitability are the biggest beneficiaries. Companies with a positive unit economics or those that are about to break even at Ebitda achieve better ratings.
“We do not see that all companies benefit equally and we expect that companies with good business models / rifts retain the traction. Larger tech companies would also try to acquire companies with complementary offerings. We are also seeing struggling companies closing as the focus shifts to the individual economy, “BofA analysts said in a report.
Investors must therefore be aware of the high risk of some companies failing. Many technology companies that used to be well funded are now almost forgotten. “Jabong is a classic case. At one point it was negotiating a $ 1.2 billion valuation for itself, and its owners had to settle for a $ 70 million price tag just a year later. And this list is long. But nobody wants to talk about negative bets; As humans, we are designed to only display our gains and not losses, “said Rathod.
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