Valuing New-Age IPO’s
The new age IPO party seems to have ended. The ₹18,000-crore Paytm IPO—which beat Coal India to become India’s largest so far—turned out to be a party pooper. The stock fell about 37% in two days against its IPO price. Its debacle shows how sentiment-driven investing does not work. It has to be backed by solid research. The new-age digital IPOs will keep coming. The ones by Mobikwik, Oyo, and Delhivery are in the pipeline. As loss-making new-age companies enter Dalal Street, conventional ways of evaluating IPOs will not work. You have to rely on different metrics.
In the absence of profits or positive cash flows, new valuation parameters are being discovered and bandied about. In each business, different valuation parameters may be relevant or applicable such as expected growth in cash flow or operating profit. We suggest you some:
The first thing to be understood is exactly what the start-up is doing and if it is relevant to make a disruption in the segment it operates. You should also see if the business model will stay relevant in the years to come. The three parameters in this context:
i) Competitive positioning, a unique business model with the company being either the segment leader or among the top three
ii) Past track record, current size and scale, future business scalability and potential growth
iii) Path to profitability
Although new-age companies typically have an asset-light model, their operating expenditure is quite high, due to their need for spending money on technology upgradation, research and development, hiring employees and ad-spends. Call it capex or opex, the viable start-ups will be the ones that are reducing their capital or operating expenditure.
Since most digital IPOs are loss-making, you cannot run conventional valuation or profitability metrics. There are other financial checks that you can run. You should see if the company has been narrowing its losses over the years; if it is generating operating profits if not net profits, and if its revenues have been growing.
“New-age IPOs have good revenue growth but still incur losses due to their substantial spending towards advertisement, promotions and employees, etc. These companies cannot be valued by traditional methods and investors should look with a different perspective like understanding the sector, strategy and future growth prospects,” says Ajit Mishra, VP, research, Religare Broking Ltd.
“Also, they should analyse market share (gaining or losing) and check their financial trend for cues on narrowing losses as that would encourage investment,”
Type of the IPO
Investors should see if the fresh IPO coming in is an offer for sale (OFS) or is generating fresh equity. Fresh issuance is better than OFS, as in the latter, the existing investors sell their shares. The split of the issue, that is, fresh issue and OFS could also impact the future price behaviour. In case a very large proportion of the issue size consists of OFS, then it may not be a good sign.