Shares of Paytm have been on a free fall since listing, declining as much as 41 per cent. In just two sessions, it is close to hitting the 12-month target provided by Macquarie last week. A similar story is playing out in Policybazaar’s shares, which have plunged about 18 per cent in two sessions.
is also down about 16 per cent in the last four sessions.
What is common to the three is not that they were recently listed but all of them are loss-making companies yet to deliver a profit. None of them plan to deliver a profit in the near future as well. They entered the stock market as businesses of the future. Many retail investors who bought these stocks are facing a severe loss on their investments.
After a humongous rally, the market has entered a consolidation phase, many analysts say. And, it is this phase that a true test of a business’ mettle happens. Only names that are focused on delivering profit come out with flying colours from this phase.
Atul Suri, CEO at Marathon Trends, who runs a PMS fund, said in a recent address to his clients that the last two market crashes and the ensuing bull run showed that during the consolidation phase, only companies delivering profits rose. “The singular point that the market recognised in that consolidation phase is that stocks that have earnings continued to move up and stocks that were just story-telling and fairy tales declined. In an euphoric phase, everything moves up but when the market takes a pause, people start bifurcating actual earnings and story-telling,” said Suri.
As was evident in the last couple of weeks, among the first and largest casualties on Dalal Street were firms that have relatively lower profit visibility. These new-age companies, by their own admission, are not focussing on profits right now.
Yashish Dahiya, co-founder and chairman of PB Fintech, said in a recent interview to ET: “You are valuing them for what they can become in five to 10 years. Let’s not be stupid and force these companies to try and declare profits early. That will be value-destroying for shareholders in the long term…without a shadow of doubt.”
The IPO prospectus filed by Paytm has clearly stated that profit might be elusive in the foreseeable future. The management also indicated the same. The company is still draining money, often in the form of cashbacks, to gain more users. No one is sure if those users will bring revenue or not.
“This is a company that seems to run on hyperbolic forecasts from its founders and top management, that are not just consistently higher than what the company delivers, but often by a factor of three or four,” wrote Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University, in his analysis of the Paytm issue.
A projection by Ridham Desai of Morgan Stanley shows a new profit cycle is starting in India and this will lift the stock markets. Most likely, these new-age technology companies will not be a part of that cycle.
These risks were evident before the companies got listed. But retail investors seem to have ignored these risks. Inexperienced investors — maybe even experienced ones — bought the rhetoric being passed around by merchant bankers and some analysts.
It will be interesting to see if they have learnt their lessons from this debacle or will history repeat itself.
