New-age tech companies rake in business but are still making losses

• Shares of new-age technology companies like Paytm, Delhivery, Zomato and Policybazaar have been beaten down since listing.
• Investors in the secondary market are showing low risk appetite to invest in these stocks until the companies show signs of profitability.
• Analysts believe low liquidity in the market, expensive valuation and no signs of profitability are reasons for the crash in the share prices of these companies.
• Year 2021 was the time when investors had gone ga ga over the launch of new-age company IPOs as they were related to the brands they had heard a lot about.

New-age technology companies like Paytm, Delhivery, Zomato and Policybazaar are among companies that make billions of revenues, but are not yet profitable. As a result, investors in the secondary market are wary of investing in these stocks until they show signs of profitability.

Not just retail investors, even marquee investors who had invested in these companies through an anchor book are also selling their shares post the expiry of the IPO lock-in period – which was in November for many of them.

“Investing in shares of new-age companies is meant for high risk-takers and not for laymen as their business models are not easy to understand and there is a lot of disruption happening in their business models. The longer it takes for such companies to break even, higher the chances of competitors entering either in direct or indirect space. Investors need to come to some sort of understanding of when these companies will reach EBITDA positive and net positive,” Deepak Jasani, head of retail research at HDFC Securities told Business Insider.

EBITDA is earnings before interest, taxes, depreciation and amortisation.

Among internet companies, share price of Nykaa has been adjusted after its bonus shares were issued a day after its lock-in period of anchor investors ended. The stock is still down from the elevated levels it saw post listing.

This move by Nykaa may spur the regulator to tighten rules around bonus/split shares. A report by Moneycontrol says that market regulator SEBI is considering a rule under which companies will have to allot bonus and split shares to shareholders within a defined period of time – the move reportedly triggered by the Nykaa bonus share issue.


Lack of visibility on profitability a concern
In uncertain market conditions, there has been a huge sell off in internet companies and the one thing common between them is no signs of profitability.

Analysts believe low liquidity in the market, expensive valuations and a lack of visibility on profitability are reasons for share prices of these new-age companies crashing.

Jasani said that key triggers for these stocks are huge addition of customers or visitors or footfalls, which will churn out profit for them. In 9 out 10 cases, this may not happen and it is even difficult to identify which is the one (of these companies) that will achieve this, he said.

Interest in internet companies lost massively
“Going ahead, only the ones where there is visibility of positive cash flows as well as (visibility on when the company will turn) real EBITDA positive, we could see the stocks bouncing back. Till then we could see underperformance as secondary market investors have gotten over the initial euphoria,” Ambareesh Baliga, an investment analyst, told Business Insider India.

Year 2021 was the time when investors had bought into these new-age companies when they launched their IPOs – as these brands were familiar and investors had heard a lot about them. The investor interest can be seen in IPO subscriptions of Nykaa, Zomato and Policybazaar, which are now being ridiculed for poor financial performance.

Low risk appetite for risky bets
"When these new-age tech stocks listed on exchanges, nobody was looking at profitability details and (all) were focusing more on the future digital technologies disruption. But now when ample liquidity is not there, there are lots of questions on valuation, profits and cash burn that are taking a toll on these companies,” Sanjeev Hota, vice president - head of research at Sharekhan, told Business Insider India.

There is a liquidity crunch in the market with central banks across the world raising interest rates. In the current scenario, companies with strong balance sheets and solid business visibility can justify their premium valuation, like Bajaj Finance, says Hota.

A report by JM Financial states that Paytm, PB Fintech and Zomato are guiding towards adjusted EBITDA level profitability between Q4FY23 to Q2FY24 while Delhivery should also breakeven by Q4FY23.

“Fundamentally, these platforms using different technology to run businesses are good but how long the cash burn will continue and how (long) will it take to become profitable is the question,” said Hota.

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