One year of startup listings: Exuberance tapers as firms lose grip on gains

After Zomato's promising start, global tech meltdown halts listing gravy train

On July 16, 2021, Zomato’s Rs 9,375-crore initial public offering (IPO) garnered over 30 times subscription, laying to rest the debate on whether the Indian public markets were ready for share sales by loss-making firms with no clear visibility on when they would turn profitable. Any doubters left were silenced by a 66 per cent surge in Zomato’s stock price on its listing day. This opened the gates for more start-up IPOs. Within months, marquee new-age companies such as Nykaa, Policy Bazaar, and Paytm rolled out their IPOs, underpinned by easy liquidity conditions thanks to the post-pandemic stimulus measures.

A year since Zomato’s IPO, the performance of start-ups at the bourses has left a bittersweet taste for investors. While most companies, with the exception of Paytm, have done well, they have failed to hold on to their gains. Shares of all new-age companies are down sharply from their record highs, leading to an erosion of Rs 3.5 trillion in market cap. Further, with the exception of Nykaa and recently listed logistics player Delhivery, most are now available below their issue price. Some are even available at valuations much lower than their private fundraise prior to the listing.

Rajendra Naik, managing director - investment banking at Centrum Capital, said it was herd mentality coupled with the FOMO (fear of missing out) factor that led to an exuberance towards start-up IPOs. “Zomato’s IPO set the ball rolling for other new-age companies wanting to list. Since then, the overall market correction and global tech meltdown have led to a substantial fall in prices. Now the valuations have moderated. It may not be as easy in the near future for new-age tech companies to come out with IPOs,” he added.

Investment bankers said the sharp correction from the peak was due to a change in liquidity dynamics. When bond yields in the US were lower, investors were willing to back non-profitable firms. However, with the cost of capital going up, the excitement has fizzled out. 

“Market conditions have changed. And many stocks have fallen from their highs. We have seen a similar trend in India and internationally with tech companies. It has affected the valuations for everyone,” said Dharmesh Mehta, MD &CEO, DAM Capital Advisors.

Experts say valuations are driven by prevailing market sentiment and it is not fair to blame these companies or bankers now.

"Stocks across the board have corrected, not just the new-age companies. In hindsight, we can say valuations could have been cheaper, but at the time of the IPO, there was enough institutional interest to justify the valuation,” added Mehta.

Following the meltdown in start-up stocks, investors have become more discerning. They are looking more closely at factors such as path-to-profitability, governance structures, and business models. As a result, IPOs of several large start-ups have been put on the back burner.

“Cash burn is no longer attractive as it was earlier. Whoever has a differentiated business model, like a Zomato or Nykaa, will get capital provided valuations are attractive and where investors can see a path to profit. Eventually, the business has to deliver on what you have promised,” said Mehta.

Naik echoed the sentiment. “Quality names that can show a clear path to profitability or profits in the near future will still have takers. Earlier valuations were based on sales multiples, this will change to profitability multiples such as EBIDTA or P/E.”