Should you bet on new-age tech stocks in a rising interest rate regime?

Shares of new-age tech companies like Zomato, Nykaa, Paytm, Policybazaar and CarTrade witnessed a huge selloff after their listing as global headwinds and uncertainty over rate hikes battered them below their issue prices.
 
However, a rub-off effect has occurred in new-age tech stocks after markets saw a smart comeback as geopolitical tensions eased.

While the BSE SmallCap index has outperformed the MidCap by 0.77 per cent in the past one month, the S&P BSE Sensex surged over 3 per cent during the same period.

Shares of Nykaa, Paytm, Policybazaar, Zomato, CarTrade, too have zoomed between 2 and 34 per cent in the past one month.

However, despite the recent euphoria, analysts remain cautious over the new-age tech stocks as interest rates rise.

This is because these companies use weighted average cost of capital as discounting factor while valuing their firms.
A rise in interest rate and in effect their respective WACCs will, therefore, reduce the current discounted value of expected earnings.

Outlook-wise, too, a dark cloud of speculation continues to hover above the new-age tech pack as companies struggle to justify their valuations. AK Prabhakar of IDBI Capital, for instance, suggests investors to avoid the new-age tech pack even if it corrects another 20 per cent.

Other brokerages, too, have been raising red flags over the new-age tech pack for a while now. While Jefferies warns adverse regulations to impact Zomato’s growth, Axis Capital believes that Nykaa’s expenditure remains at risk if consumer conversion rates fail to commensurate marketing returns.

Hence, with rising interest rates, only hard-numbers are expected to rescue these stocks from a treacherous road ahead.
The BSE Sensex and the Nifty50 closed 0.41 per cent and 0.31 per cent down respectively on Wednesday. Markets will now resume trade on Monday after an extended weekend.