The pandemic risk in IPOs

The ongoing initial public offering (IPO) rush, mostly from the start-up universe, has led to euphoric reports about steep valuations, mega fund-raising and a collection of top investors. But the draft red herring prospectus (DRHP) of most of these stock market-bound firms or those that got listed recently are a commentary on the grave times businesses have gone through during the pandemic. The adverse impact continues directly or indirectly in many cases and could perhaps intensify if Covid-19 cases rise in the coming months, as being seen in some other parts of the world, businesses have said without exception.   

It’s remarkable how Covid has found mention universally in the IPO prospectus of companies, from that of Zomato and One97 Communications (Paytm), to Delhivery and Oyo. Even the most pandemic-proof sectors have felt the heat of the virus at some point or the other and companies fear that there could be another encounter.

Zomato, the food delivery app business valued at $12 billion at the time of listing, mentioned Covid 74 times in its July IPO document of 300-plus pages. Covid is the only uncertainty in business, according to the Zomato DRHP. There are no other significant economic changes that materially affect or are likely to affect income from continuing operations, it said. After its gross order value—a key metric in food delivery—hit a low in the first quarter of FY21, the business has recovered, but revival in its dining-out services has been slow. These numbers explain how badly the business has been hit: In FY21, there were 61.8 million units of customer generated content (CGC) on the Zomato platform, compared to 157 million in FY20. The CGC could be anything from customer review to videos posted by users. According to RedSeer, 3.3 million restaurant covers were booked through Zomato in FY21, down from 12.2 million a year ago. And the opportunity in the addressable food services market has been reduced to $32-35 billion due to Covid-19, from $65 billion earlier.

Hotel aggregator Oyo, which virtually experienced a zero year post-pandemic, mentions Covid 184 times in its DRHP. Eyeing a valuation of $10-12 billion, the Softbank-backed firm noted in its prospectus that the pandemic and the measures taken by the Centre and the state governments to curb its spread have materially and adversely impacted its business. “The scope, duration, and frequency of such measures and the adverse effects of Covid-19 remain uncertain and could be severe. Resurgence of the virus or a variant of the virus that causes a rapid increase in cases and deaths, if measures taken by governments fail or if vaccinations are not administered or fail to perform as planned, may cause significant economic disruption in India and in the rest of the world,’’ Oyo has said while detailing the deep workforce cut it went through. Its total income decreased by 69 per cent in FY21 over FY20, largely due to Covid.

Delivery and logistics service provider, Delhivery, mentioned Covid 78 times in its draft prospectus for a Rs 7,460-crore IPO earlier this week. Related to the pandemic, were anxieties over shortage of labour and high rate of attrition in the industry. The company, which has foreign investors like Softbank and Carlyle, had offered performance-based bonuses to incentivise workers to stay in the job after the Covid outbreak. As Delhivery’s business mostly depends on the transportation of non-essential goods, the company’s shipment volumes decreased significantly during the lockdown, the IPO document shows. The shipment volumes in the express parcel service decreased from 73.47 million parcels in the quarter ended December 2019 to 52.60 million and 40.18 million in the quarter ended March 2020 and June 2020, respectively.

One97 Communications, the parent firm of Paytm, valued at around $20 billion, lists Covid 127 times in its IPO document. Besides the pandemic risk to business, the company has elaborated on the adverse impact on its commerce and cloud business. Revenue from its commerce and cloud services decreased by as much as 38 per cent to Rs 693.2 crore in FY21 from Rs 1,118.8 crore in FY20. This is in sync with a fall in related businesses like travel and movies. RedSeer estimates a decline of 55 per cent in travel industry and 88 per cent in movies in FY21, compared to FY20. While there’s been recovery, the company maintains that the pandemic is likely to continue to adversely impact its operations and that of its merchants and business partners.

Similarly, Covid is mentioned 78 times in the IPO document of FSN E-Commerce Ventures Ltd, which runs online beauty store Nykaa. It has sought a valuation of over $7 billion. “The successive waves of Covid-19 pandemic have and may continue to disrupt our operations, including our manufacturing operations warehouses and delivery infrastructure, and office attendance…’’ The consumer footfall in its retail stores in FY21 was 55 to 60 per cent lower than the previous year.

With the word pandemic a fixture in the DRHPs for so many months, it’s hard to guess for how long Covid will remain a part of the risk disclosure in market documents, and who will be the first one to say it’s a thing of the past.