How does one understand the valuations of some of these new tech companies? I am not calling them startups, because they are no longer startups now.
I really have never operated as a flipper or a short-term trader. One should look at investing for the long term. At Info Edge, we offered the share at Rs 320 in 2006. Just prior to the Global Financial Crisis it had peaked at Rs 1,400 or 4X in short. Within six-eight months’ time, it had gone down to 25% of the peak value. It was still above IPO price but only just and since then it in stop, start manner, it has been climbing.
It has been 15 years since we listed in November 2006. From the IPO price to now, it has given roughly 80X return. Many of the new age tech companies have got very good long-term prospects. Immediate euphoria may push the share prices up in a frothy market beyond their intrinsic value. If there is a crash, it will go way below but then it will come back up again because of the intrinsic value. So I would study intrinsic value and set a long-term time horizon and only then invest.
Are you a big votary of the importance of profit and cash flows? Do you think it needs to be analysed because while most of these new age tech companies may not make profits in this quarter or next two or three years, ultimately if none of these businesses do not make profit, it would be difficult for long-term investors to invest in them?
No, all businesses have to make profit eventually. That is why they are set up. In the long run, it will be the price of earning multiples and, of course, growth is a part. So earnings and growth are important. Now the question is can one postpone earnings of profit and prioritise growth, and if so, for how long? Maybe that is what the market and investors are rewarding today. That is why we are seeing some of these companies are trading at very high valuations despite making losses.
These are real investors who have subscribed. If Zomato was subscribed 38x to 40x, 75% of the issue was subscribed to by institutional investors who are smart investors. They think deep long before they make a commitment. Policybazaar has got a 30% to 40% pop on the third day, there is a reason and I am not talking about retail and HNI investors, I am talking about institutional investors who continue to support these companies. I am talking about the fact that Info Edge itself was not sold because we believe the long-term story of both these companies.
Do you think the right way of looking at these businesses is not to look at FY22, FY23, FY24, but just look at the growth and then extend the timeframe because at some point in time these companies would be profitable? In the public market, should one ignore the fact that they are loss making and if one is ready to increase the time frame from two to three years, these companies would be very different?
I would look at three-four things. Number one is the quality of the management team. Number two is a competitive position in the market. On both these fronts, Zomato and PolicyBazaar scored very well. Then I would look at what is the long term market size and what is the addressable market. In both cases, it is very large. Therefore if it is a 10-15-year timeframe, I would probably invest.
The big change is that the regulatory laws in China have changed. A lot of startup IPOs have global investors. Given how the regulatory environment in China is changing, could that have an impact on valuations and funding?
My submission is anecdotal. I have heard that a lot of asset prices in India today — whether in public markets or private markets, whether new IPOs or even older shares — is happening because of the excess liquidity coming in from overseas and that has made a huge difference as has money being diverted from China into India.
Nobody’s benchmarking these companies globally right now or very few are. A lot of it is liquidity driven. If you look at Info Edge, our share price was Rs 2,200 or maybe Rs 2.300-2,400 in February 2020. Since then it has grown about 3x. Have the fundamentals improved 3x or is it liquidity? And if liquidity has a big role to play in it, will it impact everybody including the IPOs? Maybe even more! Maybe fundamentals have improved, but is it 2x? I do not know.
As everybody hunts for the next Zomato, the next PolicyBazaar, the next Nykaa, PayTM obviously has not had the market debut that Vijay Shekhar Sharma always dreamt of. What would be your advice if you were to speak to him today and to the team at PayTM? The founder has worked for so long, almost went bankrupt but managed to stay afloat and got some of the best investors at the marquee table.
My advice will always be to hang in there. There have been great companies which have problems in the IPOs but if the fundamental business is sound, they bounce back. The bounce back may take a few quarters but it happens. I have read that the Infosys IPO had a problem in getting fully subscribed. It just made it past the finish line.
The Facebook IPO went at a fraction of a price a few months after the IPO and both these companies have become great companies. It is not the end of the world. If the focus is on executing, focus on the underlying business and if you execute well, share price will come back.
You are comparing the PayTM IPO with that of Infosys as well as with what happened with Facebook on Wall Street. So I am assuming that you think that it’s fundamentals, business model, etc are sound. Was it a case of not leaving enough appetite on the table for investors?
I would not want to speculate without having full information and knowledge and truthfully speaking, I have not really studied PayTM’s fundamentals. I only know Vijay Shekhar Sharma is a very good entrepreneur. He has faced adversity in the past and bounced back. When he went to engineering college, he did not know English. He learned English in college and coming from a rural background, from a family of very modest means, he has made it this far. There is something he has and that quality will come forward and I am hopeful he will execute well going forward.
The general view is that when Infosys and HDFC Bank went public, it was the beginning of a new cycle and if one bought into good companies when they were young, they turned out to be great wealth creators. But when some of the new internet companies are going public, the average market cap is north of $10-12 billion and they are giving exit to PE investors. That means chances of making great returns may be very modest?
All this beginning of a cycle is hindsight. I want to know how many analysts called it the beginning of a cycle in 1993 when Infosys went public? How many called it later on when HDFC Bank went public? We will know 10 or 15 years from now whether this was or was not the beginning of a new cycle.
For someone who has identified the original unicorns of India like Zomato, PolicyBazaar, what do you make of 34 unicorns that got created this year? Is liquidity and ease of money alone responsible for this?
What I always tell young entrepreneurs not to focus on valuation but to focus on just building value. Valuation is something the market gives you; it is a consequence of many things. Number one what kind of a company you have. Number two is liquidity. Number three is sentiment. Number four is geopolitics which impacts liquidity. If China is out of favour, then more money comes to India. So what is not in your control, do not bother about it; focus on what is in your control — your customers, your offerings and how well your business is performing. Valuation is something that the market gives you or does not give you. If $4 trillion of liquidity had not happened, would we have had so many unicorns? That is the point to ponder.
We are also in a completely unchartered territory. The new listed companies are clearly becoming more ambitious, more agile and nimble footed. Zomato wants to invest in other companies. The market regulator is getting concerned and wants to have quarterly updates on how IPO proceeds have been used and whether there should be a cap on M&A activity. Is this the way to go?
Well, obviously if there is a law, it has to be followed and I am pretty sure Sebi has got some good reasons why they are thinking of these rules. So we will wait and watch and see what rules emerge and then obviously we will have to follow them.
We are in the midst of a bull market and everything looks hunky dory. What has happened is a quick reminder for keeping the retail investors’ protection on top of mindDo you think it is time to increase the retail quota as many more start-ups head to Dalal Street? The next wave will have Delhivery, OYO, Ola, BYJU’S and PharmEasy?
If the company is loss-making going public, 75% institutional is good because institutional investors are discerning investors, they do research, they do the homework and then they come in. You do not want retail investors who perhaps do not have access to the same research or the same ability to analyse going into something and then get hurt. I think a higher percentage of institutional investors in loss-making company IPOs is a very good idea. It is a safeguard to protect the retail investors from getting hurt.
Indian capital market demands a quarterly update. The P&L, quarterly numbers are scrutinised. There are analyst calls. Some of the start-ups or new internet companies have not been accustomed to such scrutiny. Is the Indian market mature enough to handle some of the companies?
Well accounting standards do not change. Your results might change but the accounting rules, norm standards do not change and they should not change. The fact that they have to give quarterly numbers is a good requirement because it gives more transparency and investors can then make more informed calls. But, I think institutional investors are mature enough to handle this because they have seen it globally and they will go deeper into the story, they will analyse, they will ask questions and then they will produce their models and figure out if they want to stay invested, buy more, sell, whatever. The system is currently fine. Indian market, especially institutional investors, are mature enough to handle this.
Do you think currently there is an overvaluation in the Indian start-up IPO market? In that case, a correction will kick in and they will stabilise. If there is a bubble, there will be a meltdown?
I do not believe the tech IPO markets are any more overvalued than the broader market. There is liquidity everywhere — in the older shares as well as the IPO shares. So if there is a correction, it will correct everywhere.
The global brokerages are telling their global clients that India is trading above its mean averages and it is time to take some chips off the table. Your view?
This business of stock overvaluation is not just applying to IPOs, they are applying to the broader market as well.
So is it a tough time to be an investor because there is liquidity and there is a bit of a froth as well. Is it getting tough for you to find the next Zomato or PolicyBazaar?
Actually we invest at an early stage. We are very far away from the public market when we go in. Is the competition among investors increasing? The answer is yes, it is. But outcomes are larger, given where the public markets are. Market sizes are larger, given the internet and smartphone penetration in India and how much the Indian economy has grown over the last couple of decades.
So markets go up or down, one has to keep investing and when the markets are frothy, one has to be a lot more discerning on what valuation you are going in at and how much money you are putting out. I am not an expert public market investor. Zomato, PolicyBazaar are listed and so I know a little bit about how dynamics play out but otherwise we are not experts on public markets. We know a bit about very early stage investing in private markets and there I would say competition is increasing, valuations are increasing, sizes are going up but that is natural when there is a lot of liquidity.
You are a billionaire investor, how easy is it for someone who has got a great idea to approach you, how can one approach you?
Send an email with a little bit of information about what you are doing and I will connect you to the team. The email ID is sanjiv@naukri.com.
