New age technology companies back in the spotlight after Q3 performance

• Fintech companies like Paytm and PB Fintech have not only reported better than expected earnings but also narrowed their losses significantly.
• While Zomato and Nykaa did not deliver overall improvement in financials, analysts still have high hopes for them.
• Shares of Paytm rose nearly 22% from February 3 when it reported its quarterly earnings.
• Analysts say the long-term growth potential of these companies is huge in spite of the short-term challenges.

There’s no end to the woes of new age technology companies. They are in the spotlight yet again, after their mixed performance during the December quarter.

Fintech companies like Paytm and PB Fintech have not only reported better than expected earnings but also narrowed their losses significantly. Zomato and Nykaa did not deliver overall improvement in financials, but analysts remain optimistic.

Another new age company among talks is hyperlocal delivery startup Dunzo with elevated losses and massive valuation. Billionaire and chairperson of RPG Group highlighted the financials of the company in a tweet on February 15.

“New age digital stocks are not doing great primarily because the market is not doing great. India is underperforming this year with a negative 2.34 % return YTD while markets like China, HongKong and South Korea are doing very well. When India’s underperformance changes, new age digital companies also will start performing. Some results from this segment are very good like Paytm. Zomato also has done reasonably well, but Nykaa’s results came below expectations,” said Dr V K Vijayakumar, chief investment strategist at Geojit Financial Services.

New age technology companies have been under the scanner because of the massive underperformance in their share prices due to elevated valuation. However, analysts believe that the long term bet on these companies is worth it despite several roadblocks.

“The long-term growth potential of these companies is huge and, therefore, in spite of the short-term challenges, these stocks have buyers particularly after the sharp correction from their listing peak prices,” added Vijayakumar.

Paytm’s first ever quarterly operating profit impresses, builds hope
The fintech company’s December quarter performance was a big surprise for many as it posted its first ever quarterly operating profit as it narrowed down losses. The growth was driven by pick up in merchant subscription revenues and loan distribution.

“Biggest surprise is distribution business, control of cashbacks, opex,” said Macquarie in a report. Shares of the company rose nearly 22% from February 3 when it reported its quarterly earnings.

Macquarie has upgraded rating on the company’s stock to ‘Outperform’ from ‘Underperform’ with a target price of ₹800.

“PayTM has positively surprised on the distribution of financial services revenue by a wide margin and has also managed to control overall expenses and charges. At the time of listing, profit and free cash flow were not even a part of management’s discussion. However, we see a very visible change in approach of management to deliver profit, evidenced, we believe, by the core EBIDTA profitability that was reported recently,” said Macquarie in a report.

Zomato: A promising road to profitability
Zomato reported better than expected Q3 FY23 revenues, and analysts believe it may reach profitability by the end of the current financial year.

“Depending on execution-related wins, the company (ex of quick commerce) may clock profitability in Q4FY23 itself, two quarters ahead of their guidance,” said analysts at Nuvama Institutional Equities.

“Zomato’s road to profitability has grown even more promising. Zomato (ex-quick commerce) clocked adj. EBITDA level profitability in the month of Jan-23. Depending on execution-related wins, the company (ex of quick commerce) may clock profitability in Q4FY23 itself, two quarters ahead of their guidance,” added the report.

Analysts say Zomato’s relaunch of its Gold membership plan should bring growth back. Most brokerage houses have maintained a ‘Buy’ rating on the company’s stock.

“The fact that most of these companies have put forth their strategy to cut down losses and become profitable in the near future builds hope for investors. For example, Zomato’s decision to cut operations in 225 smaller cities. Moreover, since most of these new age tech companies are direct consumer based there are expectations of inflation cooling down and boosting consumer spend.” Shrikant Chouhan, head of equity research (retail) at Kotak Securities told Business Insider India.

Nykaa: Premium valuation reflects solid outlook, say analysts
Nykaa, reported a 70% on year decline in net profit in Q3 missing analysts expectations. Despite this, brokerages believe the best is yet to come for the company.

During a post-earnings conference call Falguni Nayar, executive chairperson, MD and CEO of Nykaa said that although inflationary pressures were present, it wasn’t that big of an issue for many of Nykaa’s customers.

Q3 is considered to be a seasonal quarter for the company because of the festive season and despite macro challenges Nykaa’s growth was applauded by analysts.

“In a quarter rampaged by a tougher macroeconomic environment, Nykaa reported substantial growth in Q3FY23 numbers,” said a report by JM Financial. The brokerage firm has assigned a ‘Buy’ rating on the stock.

“We continue to see increased strength of the dominant positioning in beauty and personal care (BPC) vertical while the newcomer, fashion vertical, has gained market share at the cost of a sharp dip in contribution margin,” added the report.

Nykaa’s EBITDA margins came under pressure and fell to 5.3% in Q3, as against 6.3% in the same period last year.

“While we expect Nykaa’s GMV growth, at 35% in FY23E-25E, to be the highest within our global ecommerce coverage, we believe Nykaa’s valuation premium (FY24 EV/GMV of 3.1x vs 0.5x median for peers) already reflects this solid growth outlook and Nykaa’s stronger margin profile,” said a report by Goldman Sachs. The investment banker has assigned a ‘Neutral’ rating on the stock.

PB Fintech on course to profitability soon
The December quarter performance of PB Fintech, the parent company of Policybazaar and Paisabazaar, was another surprise for investors as the company narrowed its losses significantly.

Its insurance premiums jumped 70.3% on year to ₹30.3 billion driven by a strong showing across segments.

“Given its market share of 90%-plus in online insurance sales and a growing offline presence, PB is poised to post strong sales,” said analysts at Nuvama Institutional Equities.

Further, the management expects revenue and margins to improve further as agent productivity rises and benefits of appointments channel are realised. They hinted at a sharp profitability uptick in Q4, say analysts.

“This growth becomes even more impressive considering the seasonally weak Q3 for insurance, where new business premiums for life and general insurance declined QoQ by 19% and 12%, respectively,” said a report by JM Financial.

New-age internet based businesses, like their unlisted peers, have been chalking out strategies that lead them towards profitability and are already on a growth path aided by their unique business propositions — allaying investor and analyst concerns.


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