The year 2021 marked an extraordinary phase for the Indian stock market. Traditionally known for their conservative investors, the bourses enthusiastically embraced the listing of new age tech companies, even those which were yet to declare profits. Out of the total Rs 178,025 crore raised in the market in CY21 and CY22 by 103 mainboard initial public offerings (IPOs), 27.17% was directed towards new age tech companies that were still fine-tuning their business models and relied on investor funding, according to data from primary capital market tracker Prime Database.

Key players in the Indian tech ecosystem, such as Paytm, Nykaa and Zomato, collectively raised Rs 33,025 crore through their IPOs in 2021, despite a meagre combined consolidated revenue of Rs 8,093.68 crore in FY20. Indian investors appeared to be seeking the next Amazon or Google, investing in ideas proposed by tech companies valued in the billions.

Following a hiatus of six months, ascribed to the downturn in the stock market, the IPO frenzy at the bourses resurged, witnessing the debut of 57 companies in 2023. However, there has been a notable transformation in the narrative. Only two of them hail from the cohort of new age companies, spearheaded by first-generation entrepreneurs. The tide appears to have shifted back in favour of legacy firms. These stalwarts had successfully raised Rs 46,802 crore in the 12 months up to December 17, 2023.

Overpromised, Underdelivered

In November 2021, when the story of internet companies was playing out like a dream, Vijay Shekhar Sharma-led Paytm, with a valuation of approximately Rs 150,000 crore, announced its IPO, with plans to raise Rs 18,300 crore. This marked the largest IPO in India’s history at that time. However, the stock’s debut on the BSE at Rs 1,955 was 9% lower than the issue price of Rs 2,150, closing 27% lower at Rs 1,564 per share on its first day. Since then, the stock failed to reach its initial listing price and witnessed a decline of over 60% as of December 12, 2023.

As seen in previous instances with significant IPOs, the fervour among investors received a reality check due to the decline in value in Paytm investments. Varun Vijayan, director and head of tech, digital and new age business at Anand Rathi Investment Banking, points out that big companies like Zomato and Paytm, which rolled on the growth they witnessed in the Covid-19 period, failed to sustain that growth, which resulted in them losing almost half of their market cap and investors’ money.

“When the fundamentals are not strong, eventually the perception of the segment goes down and when the perception goes down, the mood of the investor changes. Investors do not analyse the companies individually, except for some unicorns. Most of the companies are part of clusters. Now, in that bucket, when the larger companies, which have launched bigger IPOs and robust listings, if they do better, the segment will get better. If they fail to perform, the segment will go bad,” says Vijayan.

The bigger companies like Paytm, Zomato, Delhivery and Nykaa failed to deliver on their initial promises to the investors, because of which the market cap went down. It eventually resulted in the whole segment getting a negative perception. This has resulted in other companies too losing the growth that they were expected to see in their market cap.

Word of Caution

Ashneer Grover, founder of fintech firm BharatPe, had foretold the impact of Paytm IPO on the trust factor of investors in new age companies. “I used to tell investors that there’s going to be two markets—pre-Paytm and post-Paytm—because post-Paytm is going to tank and that is exactly what has happened. The reason is quite simple, you have mispriced your IPO,” Grover had said.

“You did a Rs 18,300 crore IPO, out of which 55% was secondary. You did a price optimisation. It is the Chinese investors who sold their shares through this IPO. Indian market ko kharab karke aapne Chinese investors ko unka paisa wapas diya hai. (You disrupted the Indian market to return Chinese investors’ money),” he added.

Prashanth Tapse, senior vice president (Research) at Mehta Equities, says that in the case of new age companies, the trust factor remains risky right now as profitability still appears far away. Currently, companies are reporting adjusted EBITDA profits, which are not real profits. Investors are better informed about these terms and are getting smarter with more data in the market. It is difficult for any new age company to gain investors’ trust in the current scenario until they show real profits on a quarter-on-quarter basis, he says. “It is difficult to sustain the business because new age companies need to spend significantly high on acquiring new clients, which could lead to high cash burning activity, which is risky for any investor,” he observes.

The US Federal Reserve’s decision to raise interest rates in March 2022 dealt a blow to new age companies which had previously expanded their businesses with the money of venture capitalists. The funding winter, triggered by costly private capital and a shift of funds from emerging markets to US bonds, not only hampered the launch of new IPOs but also carved into the valuations of unlisted tech companies. The situation has raised concerns about the viability of their existence. A spate of frauds began to be reported among Indian new age companies, considered one of the reasons behind the exit of global VC firm Sequoia from Asia.

Giving Zomato’s example, Mehta explains that food delivery platforms have started charging a premium on the delivery charges, hence the stock is sustaining and trading around Rs 120 to Rs 125 in these markets. But other companies are finding it difficult to charge higher premiums and customer acquisition is difficult for them. To acquire new customers, they need to burn cash and high cash burning leads to less visibility of profitability going forward. Hence, it is the investors with risk appetite who continue to hold new age companies in their portfolio, while conservative investors avoid them.

Approximately 35,000 people have lost their jobs in 121 Indian start-ups, with 23 companies having shuttered their business in last two years, according to an Inc42 report. But while the sentiment around new age start-ups dampened and their appetite to list on the markets weakened, firms in traditional sectors are making a comeback on the bourses. The trust factor seems to be in the favour of legacy players which have delivered returns time and again.

Return of Traditional Economy

The year 2023 has seen a comeback of the momentum in the manufacturing sector, with industrial activity posting robust growth month after month. The index of industrial production was at a 16-month high at 11.7% in October.

The mood in the stock markets has also shifted towards sectors linked to the pickup in industrial growth. Thematic indices, which include capital goods, power and manufacturing, have outpaced the benchmark indices, which is an indication that investors’ trust lies in how the India growth story is shaping up.

The BSE Capital Goods Index witnessed a growth of around 14% in 2022 while in 2023, the index has recorded a growth of 64% as on December 18. The BSE Power Index grew 25% in 2022 and over 31% in 2023. The BSE Manufacturing Index rose 6.5% in 2022 and 29.6% in 2023.

In 2023, nearly 50% of IPOs listed till December 19 came from the manufacturing sector amidst a lull in the new age tech segment. As the focus returns to traditional sectors, investors in the primary market have also flocked back to legacy companies in different sectors, which have been in the industry for decades. Recently listed legacy companies have an edge over new age tech companies due to their stable fundamentals, profitability and association with established groups.

According to Satyen Shah, president and head at Nuvama Investment Banking, traditional companies in various sectors, including manufacturing, pharma, chemicals, etc., were never crazily overvalued because of the market euphoria or other factors. They were always being valued on the basis of their operational performance and profitability.

“If we analyse the performance of IPOs of traditional companies, majority of the stocks have performed well and given handsome returns to investors. New age companies, on the other hand, had a big correction in valuations as investors started focusing on profitability metrics versus simply growth. In addition, some of them also had a lot of supply from the earlier set of private investors as lock-in post IPO opened up,” Shah says.

JSW Infra’s listing is a good example of investor sentiment. Backed by the 71-year-old Jindal Group, the company had a bumper listing at 20% premium for the market earlier last year. A similar story played out in favour of the Tata Tech IPO from the Tata Group, which more than doubled investors’ wealth. The common thread linking the two was not only the backing of a legacy group, but also the strong fundamentals of the companies. JSW Infra has reported a 126% year-on-year growth in profit after tax (PAT), from Rs 330.44 crore in FY22 to Rs 749.51 crore in FY23. Tata Technologies reported PAT of Rs 624.03 crore in FY23, up 43% from Rs 436.97 crore in FY22.

Sneha Poddar, associate vice president for retail research at Motilal Oswal Broking and Distribution, notes that in the secondary market, a company’s earnings are highly crucial and, if the earnings growth is not good, it tends to be punished by the investors. “In case of legacy companies, investors have a better understanding of the business models, scalability and future prospects due to availability of data, healthy quarterly financials and proven track record,” she says.

Unhealthy Hype

With the strong returns posted by traditional legacy companies in the primary market, the trend of who chooses to list on the bourses has changed. The recent listing of the new age brand Honasa, the parent company of cosmetics brand Mamaearth, indicates that fundamentals will continue to triumph over hype which fuelled the listing of such companies earlier.

Honasa had managed to grab attention with its much–awaited initial public offering. However, the attention failed to translate into a bumper listing, with just 2% premium on its issue price. The company went for listing at a time when it had started posting profits. In the September quarter of 2023, it had reported PAT of Rs 29.44 crore, up 93.76% from Rs 15.19 crore in the year-ago period. The IPO was launched on October 31.

Commenting on how the markets have changed, Poddar says, “Nowadays, investors do not ignore the valuations completely, unlike in 2021 when there was euphoria as these companies were hitting the markets for the first time. When the valuation is reasonable, investors like to have a look at the company, depending on what kind of business model it has and its current position.”

Vijayan points out that new age companies with identified profitable businesses are gearing up for their entry into the market. “There is a lot more to do in terms of public offerings, of which the main part is to find sustainable and profitable growth strategy in their core business,” he  says. He is of the opinion that the likes of Zomato and Paytm need to re-think their strategies for profitable and sustainable avenues, which their competitors have found, and focus on building that. This can clearly change the perception of the investors.

As the Indian stock markets navigate the volatility of new age tech IPOs, it is evident that the earlier excitement around such companies has given way to a more cautious and critical approach from investors.

Data suggests that legacy companies’ focus on fundamentals has triumphed the new age brands’ promise of growth. Whether the trust in promises of new age brands will return depends on how much they have learned from the behaviour of the market in 2023.