Paytm could be a test case.
Until the biggest IPO in India’s history failed to live up to its superlative billing last week, India witnessed an unprecedentedly successful run of IPOs in high-growth companies that have business models broadly out of kilter with conventional valuation metrics. Cash flow discounting, replacement valuation, implied profitability or asset multiples – all traditional methods of valuing businesses – seemed rather inadequate to account for investor keenness to buy into the likes of Zomato and other new-age companies.
Growth Trumps All
The standard explanation for stellar market cap debuts for these new-age companies was ‘growth premium’. Companies with a visible technology spine, with no geographic boundaries constraining operations, were bought into by eager savers on the premise that growth would eventually trump every other metric worth tracking – and justify valuations that many traditional companies have taken decades to reach.
Such has been the enthusiasm that 53 IPOs garnered about Rs 1.08 lakh crore in 2021, led by new-age start-ups such as Zomato, PolicyBazaar, Nykaa and Paytm. That handsomely beats the 2017 record, with a month and a bit to spare in the year.
So far, this is the story of the upward deviation from the mean, which has taken the Nifty past 18,000. More importantly, five new-age IPOs had soared above their offer prices on listing, putting the spotlight on the need to re-visit credentialed valuation theories.
Then came the IPO of Paytm, a company perceived to be at the vanguard of a digital-finance revolution, in a nation that conducted the bulk of its transactions in hard currency, as records from five years ago showed.
The IPO had a star billing. At Rs 18,300 crore, the issue comprising both fresh shares and offer for sale (OFS) equity dwarfed predecessors by a country mile. But curiously, the portion of stock reserved for rich investors and bulge-bracket purses remained undersubscribed as the issue drew to a close.
A Sedate Start
Then came the underwhelming Judgment Day: November 18. It was the first in six new-age IPOs to get off to a sluggish start, meandering its way to the trough and slashing about a quarter of its implied market value of close to $20 billion in a matter of six hours.
And what followed next was a target downgrade – and a sudden shift in momentum that puts the spotlight on the mean – or, more precisely, reversion to the mean.
As the Paytm IPO built around the theme of unbridled growth – a game-changing alternative to conventional banking – seeks to regain its touch, question marks are already beginning to appear on the potential market receptions to similar share sales planned toward the latter half of FY22.
To be sure, the broader markets have already retreated about 5% from their peaks in what might be seen as the beginning of a tortuous retreat toward a more modest mean. This process could well be hastened for stocks trading at rich valuations seemingly unjustified by their cash flows and profitability.
Welcome back to terra firma.
