NEW AGE BUSINESS IPO UPDATE
The internet method has made applying for shares in initial public offerings (IPOs) easier. On the other hand, getting an allotment is a matter of luck. A market trend can be a two-edged sword. Some people benefit from trends, while others may lose money. Let us look at the present status of some of the new-age IPOs that were launched in 2021
An analysis of the newest age companies listed during the IPO boom of 2021 indicates that 5 out of 6 stocks are below their IPO price, and 4 out of six stocks are below sixty per cent. In our previous communication, we had warned investors about the unjustified valuations of the new-age companies.
Standard Deviation – Measures deviation of the dataset from its mean. A volatile stock has a higher Standard Deviation and vice versa. To put it simply it tells how much an asset’s return varies over the observed period compared to its mean return.
Among the six companies, the fall in PAYTM’s share prices is the steepest, as investors have lost about 70 percent of the total investments they made a year ago.
In July, when the lock-in for Zomato investors had expired, the stock price declined by over 20 per cent in just a few days, and the shares of Paytm, PB Infotech, and Nykaa may face pressure as the lock-in period for Pre-IPO investors expire in November.
Investors have had a history of euphoria with IPOs like the internet companies in 2000, Real estate in 2007 to 2008, Hospitals & Pathology in 2015, microfinance institutions, banks & insurance in 2016-17, the 2021 frenzy of chemicals, pharma and new age businesses was not any different.
In 2020-21 interest rates were at their lowest levels, and massive amounts of liquidity were infused to support economies impacted by Covid. The excess liquidity made its way to IPO since equity markets were creating new highs leading to bubbles in the new-age businesses. In 2021-22 central banks hiked interest rates aggressively, squeezing liquidity out of the system, and these new-age businesses with no clear visibility of profitability were impacted and have corrected significantly.
While the prices are down considerably, it doesn’t imply that valuations have become cheap since some new- age companies are still unprofitable and generating sustainable profits are years away and uncertain. We recommend investing in companies with a sustainable business model with a track record of profitability and stakeholder-friendly management with the capability of execution.
For example, let us look at a few companies that launched IPO in 2021 but have a stable business model and higher growth potential with a clear view of profitability. Go Fashion (India) Ltd, launched IPO in 2021 and was incorporated in 2010, it is one of India's largest women's bottom-wear brands. The company offers one of the widest portfolios of bottom-wear products among women's apparel retailers since it is engaged in the development, design, sourcing, marketing, and retailing of a range of women's bottom-wear products under the brand, 'Go Colors'. We have internal criteria such as three-year sales growth of a minimum of 8 per cent, 3 Year average ROCE of a minimum 12 per cent and the latest D/E to be lesser than 1.5 for filtering stocks. GOCOLORS has grown at a CAGR of 12 per cent over the last three years with a return ratio, ROCE of 16 per cent adjusted for Covid-19 impact and Debt to equity of 0.5 in FY22. The company has clear signs of profitability and is expected to open 120 stores annually which will drive the growth of the company going ahead. It was launched with an IPO price of Rs.690 per share, and as of 31 st October 2022, the company was trading at Rs 1399.40, up 103%.
The bottom line is that Investors should invest in companies with sustainable Business Models with a track record of solid profitability and shareholder-friendly management with execution capability; this helps generate wealth over the long term.