A stunning two-day plunge by India’s after its initial public offering casts a shadow over the prospects for technology firms preparing to go public in what was supposed to be the country’s breakout year.
Retail investors, who bought an unprecedented amount of shares in Paytm’s parent One 97 Communications Ltd., have seen more than 35% of their value wiped out in just two trading sessions. Further losses may be in store if the stock slumps from its Monday closing price of 1,359.6 rupees to the 1,200 rupees predicted by Macquarie Group Ltd.
“The event in a way will nudge people to be cautious and not take the market for granted by blindly placing bets,” said Gopal Agrawal, managing director and co-head of investment banking at Edelweiss Financial Services Ltd. “It is important that a company’s story and prospects are well understood by investors.”
India’s equity markets have been on a tear this year, buoyed by a central bank that slashed interest rates to a record low and millions of new individual investors seeking higher returns in riskier assets. The rally has encouraged at least half-a-dozen technology startups to seek to public listings, including SoftBank Group Corp.-backed Oyo Hotels & Homes and logistics provider Delhivery Pvt.
At least some of the IPO prospects that have been “on the periphery” and looking to benefit from the flood of transactions, may now rethink the timing and pricing of their issues, Agrawal said.
Firms in the South Asian nation have raised about $15 billion through IPOs this year, already an annual record by total proceeds. Critics have been questioning valuations on some of these IPOs, given they are still loss-making companies.
“The pandemic led to huge technology adoption in the country that got priced into the valuations of many technology companies,” said Ashutosh Sharma, vice president and research director at Forrester Research Inc. “Is this the beginning of a downward trend? I don’t know. But going forward, investors will look cautiously on the risks and business future of tech companies.”
Paytm’s valuation, at about 26 times estimated price-to-sales for the financial year 2023, is expensive especially when profitability remains elusive for a long time, Suresh Ganapathy and Param Subramanian of Macquarie Capital Securities (India) Pvt. wrote in one of the few research reports covering Paytm’s prospects. Most fintech players globally trade around 0.3-0.5 times price-to-sales growth ratio, they said.
Paytm’s large IPO size also restricted demand, which could bode well for smaller prospective IPOs. Food delivery app Zomato Ltd. and beauty startup Nykaa — both smaller than Paytm’s offering — have seen their shares surge more than 80% since their IPOs.
Edelweiss’s Agrawal suggests pricing share sales to “leave something on the table for investors.”
“If an issue could be priced 10% higher or lower, it will be advisable to go with a lower pricing, which offers a much bigger upside when it comes to trade,” he said.