The floodgate for New Age Technology Company IPOs was opened by Zomato Ltd. So much so, there was no dearth of capital/cash flow required to fill in for the IPOs rather it was the lack of quality or number in terms of merchant bankers and distribution networks for managing the IPOs. Zomato Ltd. is pioneer in this space for taking the risk, for being the first one to build a book for IPO for a loss making entity. Zomato still stands from others in a rather peculiar way (will talk about it another piece).
Exactly after its successful listing, the floodgates opened. Compounded by the liquidity in the international markets, and dearth of investing products in India, especially with the dwindling rates of debt market products. After Zomato, CarTrade, Nykaa, Paytm, PB Fintech, the list goes on and on. So much so that Nykaa’s peak valuation ($ 14.8 Billion) exceeded the total industry size ($ 13.50 Billion) of cosmetics market in India. It’s not the case that cosmetic industry is doubling every 2 years, hell not even 5 years. In reality, cosmetic industry is perhaps growing at a lesser pace than FMCG business.
Take the case of PB Fintech, which has cornered 1% of the Insurance business and yet commands 10% of its market value and still in losses. To be fair, they still have a lot of market cover, particularly with low penetration of insurance in India. Insurance Companies in India are even offering 50% of its premium as distribution commission. But PB Fintech is still in loss, their CEO says, please don’t force us to be profitable; we can be profitable any day we can; but until then our cost of customer acquisition will exceed the commission. They can spend 50% of premium value in customer acquisition. Nobody is allowed to say 50% out loud. The insurance regulator may even ban me for writing this.
And the issue does not stem from these new age listed technology companies, it is present in Indian ecosystem of technology companies, from startup founders to customers, to VC funds to established companies. Indian ecosystem scoffs at product companies (Freshworks, ZOHO) if you have heard the name. Technology companies built on business/market innovation like Zomato, Paytm become generic, one day or the other. Ultimately India is all about service companies in technology space, be it Wipro, Infosys, TCS, Cognizant, HCL to so called new age technology companies, like Zomato, PB Fintech, Nykaa, CarTrade and now even Paytm.
All new age technology companies are paying thrice the salary of a TCS employee, as it becomes difficult to recruit talent for startup. So couple of system and people audit in few quarters will make these companies profitable. But now Zomato can say, I am not a startup, I am an upstart. I am not going anywhere, your job is secure and you can build a great career in my company.
Now with the drubbing of these shares across the Board on the stock exchange, retail investor has put his head in his ass like ostrich to understand, what does it mean; after all I am transacting everyday on these companies platforms. The businesses are growing. Their management and the Board is trying to understand to improve unit economics and bringing down cost of customer acquisition/customer retention.
All the financial pundits sitting on Dalal Street wondering, how do you value a loss making company, they didn’t have a view or approach in their investment thesis for new age technology companies. They have a basis for valuing Tata Steel & Tata Motors (perpetually loss making companies) due to their asset base. Not many brokerage houses are willing to cover these companies to generate investor interest over a period of time. All the traditional modes/models of stock broking ecosystem are not able to wrap their heads around the technology companies. To the skeptics, there will come a day, when these companies will function normally like Infosys & HUL, carrying on their business model with profit, when the market settles at a point.
What is the unique or the IT factor of new age technology companies listing in India? It’s the Shareholding Pattern.
All listed companies in India are promoter held entities, with the promoter family owning or controlling 40% - 70% of their company through family members or promoter owned companies. Take the case of Uday Kotak, who fought tooth and nail with the regulator to not bring his stake down. As a Bank, Uday Kotak cannot own more than 15% or 20% (or whatever), but he dragged his feet till the day he could and even beyond took extensions or filed cases against the RBI.
The most unique feature of new age technology businesses in India is that these are founder led companies with founders (promoters) owning less than 10% of their company. If we look at the shareholding pattern of Zomato, founder Deepinder Goyal owns 5 – 6 % of the Company, and 70% of the company is owned by various classes of institutional investors/VCs/PEs spread across the world. Indian public (retail investor) was able to trust enough to invest in company, where owner is not owning half his company.
What is happening in these stocks with price drop of 40 – 65%, not all can be special like Paytm (Paytm is actually setting a new record in fall) is that the investors (particularly foreign) are dumping the stock in the market. Market is only the function of simple rule of economics, demand and supply. If the supply is more than the demand, the price will come down.
Indian promoters are always told to keep a watch on shareholding pattern with 50% of the shares not available for trading in market, even if the company/business is not doing well. Keep the demand coming for your shares, you may be able to tide over this phase.
We are not speculating on the shareholding pattern of these new age technology companies. When the float is 95% of the total pool for the market, it is bound to give oscillations. The jury is out, but we will know in April, when the quarterly shareholding pattern is filed in stock exchange. A significant change (even 5%) in shareholding pattern in new age tech cos. will witness another round of sell off irrespective of their financial numbers/GMVs or whatever parameters by which they are valued.
The new age technology companies are jostling between two set of investors, one PE/VCs who are willing to bet on them, and the other who invest in growing profitable companies. Former is looking at the exit door, and the later is just staring at the exit door from outside.
Nykaa is the only company amongst the new age tech cos. in which promoters still own more than 50% of the company. It is straddling the old world and the new world, with significantly less free float as compared to other new age technology companies. Nykaa’s shareholding pattern builds the balance, which is required to sustain the stock market demand-supply pressure in Indian equity bourses. Nykaa’s MD can be termed as Founder for PE/VCs and Promoter for traditional Indian investor.
Not to mention the fact, that if other shares are hammered in the market, Nykaa will also be part of the pack. But Nykaa will still hold stronger than its peers, only for its shareholding pattern. The resourceful promoters (Nayar Family and their Trust) can also acquire shares from open market in case they witness big correction. The reason for its phenomenal listing gains, the reason it still stands above its IPO issuance price band besides Zomato and rest all trading at 30 – 60% discount from their IPO band.
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