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BW Businessworld

Newbies On

Are investors and the markets ready for loss making companies? The slew of IPOs by new-age Unicorns and established startups suggest an affirmative

Photo Credit : Shutterstock


ON 20 July Swiggy said it had raised $1.25 billion from investors that included top players like SoftBank and Prosus. On 23 July, rival Zomato listed on the stock exchange on the back of its much celebrated Rs 9,375 crore IPO. It is the first Indian Internet Unicorn to make its stock market debut. And in all likelihood, Zomato’s market debut will pave the way for more new-age tech companies to list. But private marketing funding, as Swiggy did, would likely continue to be the preferred path for many. While its sounds like a dichotomy, it could actually be a new normal for the Indian economy.

Experts say a number of startups and new-age tech platforms such as Nykaa, Delhivery, Mobikwik, PolicyBazaar, and Lava Mobiles, are said to be preparing for IPOs. Some of the recent IPOs also saw lossmaking companies like Barbeque Nation, Burger King, Zomato, Nazara Technologies and some more go in for listing thanks to the changes in listing guidelines issued seven years ago.

As per the Red Herring Prospectus of Zomato, the company is loss making but over FY 2018-FY 2021, the company’s orders grew nearly 8x— from 30.6 million in FY 2018 to 238.9 million in FY 2021—and its Gross Order Value grew over 7x from Rs 1,334 crore in FY 2018 to Rs 9,483 crore in FY 2021. Despite the impact of Covid-19, company revenues have grown at a CAGR of 62 per cent during FY 2018-FY 2021. And these numbers are possibly the reason behind its stellar listing. On 23 July, upon listing, Zomato shares hit a market capitalisation of Rs 1 lakh crore. The stock opened on the NSE at Rs 116, over 50 per cent higher compared to its issue price of Rs 76. The listing price on the Bombay Stock Exchange was at Rs 115, up 51.32 per cent. Again on 26 July, the second day after listing, Zomato’s share prices continued its upswinging with a 14 per cent jump to hit Rs 143.75. It ultimately ended the day nearly 12 per cent higher at Rs 140.85 against the previous close of Rs 125.82, thereby taking its market cap to Rs 1.10 lakh crore.

What explains this grand success of an otherwise loss-making startup? There could be three main reasons for this says Shikher Jain - Equity Research, Anand Rathi Shares & Stock Brokers. “It has a strong brand name and recall value. Solid growth plans going forward as it will invest in new products, technology, and would further deepen the relationships with restaurant partners. Lastly, it will continue to invest in delivery infrastructure and expand on the delivery partner base,” he says.

Listing Norm for Loss-Making entities say that any issuer not meeting the previously required profitability criteria (companies have to be profitable for the past three years with certain minimum monetary thresholds) may be permitted to tap the public issuance route subject to two conditions. One: At least 75 per cent of the issue size shall be mandatorily allotted to qualified institutional buyers (QIBs), against the existing norm of 50 per cent. This shields retail investors from a potential downside. Two: of the remaining 25 per cent, 15 per cent shall be allocated to NIIs or NonInstitutional Investors and 10 per cent to RIIs or Retail Individual Investor.

That being said, that fact is that Indian capital markets are experiencing an unprecedented run. Recently, the Sensex surpassed 52,000 points, and the total market capitalization crossed $3 trillion for the first time in history. “There are over a 100 Unicorns in India and the capital markets landscape is continuing to shape up to attract new-age companies to list in India while the momentum of traditional companies c o n t i n u e . C o m p a n i e s have announced their plans to list in India as deeper pools of capital are available and investors continue with a global horizon,” says Prashant Singhal, Emerging Markets, TMT Leader, EY But all the hype around Zomato IPO has not impressed India’s ace investor Rakesh Jhunjhunwala, Founder and Chairman, Rare Enterprises. He recently said on a public platform that Zomato needed to demonstrate frugality, corporate governance and technology in order to justify its high valuation and the Rs 1 lakh crore market capitalisation. He wished Zomato “good luck”. “What I buy is very important, at what price I buy is most important. Let Zomato be worth Rs 99,000 crore and Tesla be $6 Trillion. I am not going to buy these stocks,” he said.

Besides the newly built in flexibility in the listing norms, what else could explain this phenomenon of an ever growing list of new-age tech-based platforms preparing to list? Jill Deviprasad, Partner, Investor Relations Practice, EY India, has an explanation. “What was slated to happen by 2025 is happening in 2021,” she says. But what does that mean? According to Deviprasad, because of the pandemic forcing people to stay indoors, the ‘e-behaviour’ is here to stay. And several of these startups that are agile and need to adapt fast to market changes, need funding to grow further. “Others have private equity investors who see the opportunity to exit their investments with handsome returns,” she adds. And that is the reason why what was expected to happen four years from now is happening in 2021, thanks to the abundance of liquidity and low interest rates.

Happy trading! But do note: such investments are subject to market risks, read all scheme-related documents carefully.