Ignored earlier, proven now: Indian startup IPO market is in a massive bubble!

Paytm, CarTrade, PolicyBazaar stocks have tanked more than 50%; Zomato, Nykaa more than 30%; and Nazara and MapMyIndia below listing price! No takers for MokiKwik and OYO IPO. People's billions of dollars have gone down the drain until now. Time to visualize the bubble?

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In November last year, right before the first IPO launched by any startup in India, experts were in no doubts that India was at the cusp of the IPO revolution. Startups were lineup for IPO and many were working on the draft red-herring prospectus to obtain approval for SEBI for IPO. The overwhelming success of Zomato IPO, Nykaa IPO attracted the eyeballs of institutional investors and they started pushing their portfolio startups for IPO. Retail investors were excited about the IPO gains to the tune of 100% within a few days of listing.

Within just 6 months since the celebration, all the excitement among Indian startups towards IPO has started fading away. The table has turned!

Ignored earlier as well, a sizeable number of fund managers and investment advisors are now pressing warning bells to alert investors who are gung-ho about startup IPOs.

The biggest setback came from Paytm IPO, which received a lukewarm response from the market. Still, it managed to attract a sizeable number of investors who poured in money in anticipation of huge listing gain by ignoring the warning of fund managers. In November, Dazeinfo mentioned how Rakhi Prasad, one of the renowned fund managers, while speaking to Bloomberg, issued an alert to investors in regards to Paytm IPO. Within the first week of Paytm listing, it became clear that Paytm is the worst listing in a decade.

Rakhi wasn’t alone who had many reservations against the startup IPO. Another investment advisor Abhishek Basumallick, Chief investment advisor – Intelesence Capital, was vocal too and openly expressed his concerns about the increasing number of Indian startup unicorns floating their IPO.

Many turned a blind eye to Basumallick’s statements and advice, while few didn’t shy away from mocking him then.

Fast forward February, Paytm is trading all-time low. It is down by more than 60% than the issue size, making investors accumulate huge losses, without any sight for recovery in near future. The Big 4, including the most bullish JPMorgan, believes that Paytm will not be touching its listing price – forget issue price – anytime soon.

Zomato was listed with a 53% premium to Rs 116. However, the stock is now down 28% from the listing price. With each passing day, it’s declining to come closer to the issue size of Rs 76. On Friday, February 18, 2022, the market was closed with a Zomato trading at Rs 85.80. Within the last one month, Zomato stock crashed by 33%, making investors lose hundreds of millions of dollars.

The story is no different for Nykaa, the fashion startup which was listed with nearly 80% gains on the stock market. The issue was oversubscribed by 82 times, which resulted in a bumper listing of Nykaa at Rs 2,001 and within a few hours, it touched Rs 2,129. As of February 18, 2022, the Nykaa stock was trading 31% below the listing price, and the constant fall continued amidst the news of widening loss.

Both Nazara and MapMyIndia, which were listed last year are trading below the listing price, and fast slipping closer to their issue price.

But the worst debacle came in the form of Paytm, CarTrade, and PB Fintech (PolicyBazaar), which are trading at much below their listing price. Paytm is down by 60%, CarTrade is down by 63% and PB Fintech (PolicyBazar) is down by 41% after the closing hours on Friday, February 18, 2022.

Besides institutional investors, many marquee investors, including Warren Buffett, have lost hundreds of millions of dollars so far. The fast tanking valuation of Paytm has worsened the situation and now questions about the future existence of the company under the current leadership are being discussed galore.

The impact of the above is quite visible now. Many IPO-bound startups, which were aggressively working to launch their IPO until now, have either postponed their plans or gone back to the drawing board to rework their valuation that could appease investors. MobiKwik and OYO top the list of such startups.

So, what all of it is indicating? It reminds us of the strong views of Basumallick’s about the blind race Indian startups are getting involved, which, in turn, makes retail investors lose thousands of crores of their hard-earned money. It also proves that Basumallick was correct in assessing the value worth of IPO-bound startups.

Basumallick believes that the Indian new-age IPO marketplace is in a big bubble.

In a write on ET, he explains that the IPO bubble in India is a result of over-ambitious startup unicorns’ promoters who are racing to sell their losses-making businesses to people in order to secure their futures. No one is questioning how much of the IPO is an OFS (offer for sale), which is quite critical to understanding the sustainability plan of a startup. This is where existing investors and promoters dump their holdings onto unsuspecting and over-excited public shareholders.

Many of you may question who should be blamed ultimately? Also, why would investors pay 30-80 times sales to buy companies that aren’t profitable, have no path to profitability, or are indulged in a highly competitive scenario where any profits earned can be lost to survive in a cut-throat market scenario?

Basumallick, a value investor with nearly two decades of stock market experience, continues to explain that it is probably because of the phenomenal run of Big Tech (FAANG, etc.) in the US. Indians have witnessed the incredible performance of companies like Amazon, Facebook, and Google, and believe that it’s time for them to make money with these new-age tech stocks.

It’s important to note that many startups, including, Amazon continued to incur losses for some time. And that’s why many retail investors in India believe that it could be the same case with loss-making Indian startup unicorns going for IPO.

But Basumallick argues that such thoughts have a lot of incompatibility issues when considered in the Indian scenario.

Startup IPO Bubble: Issue vs Issues

Basumallick explains that basically there are two fundamental problems with Amazon’s example:

  • Amazon was not doing well in its retail business, but AWS, something that no one expected, arrived and began to spew cash with a vengeance. This cash was what enabled the stock to reach such high heights.
  • Amazon has been a global leader that can use its size to lower its costs. Amazon built its business around being low-cost and consumer-friendly. This allowed it to pass on large amounts of its scale-gains back towards customers, creating a vicious cycle. Amazon’s size allowed shoppers to buy products at a very low prices, hence more people purchased more products on the platform. This in turn led to Amazon’s increasing scale. However, this isn’t enough as many other players in the offline market did the same thing such as Costco and Walmart. Walmart attempted to replicate the same online, but was unsuccessful.

He also argues that those who defend the thought of startup IPO by giving examples of Amazon and Google tend to forget the fact that each of those companies already has had a global presence at the time of IPO. Besides, their offerings are perfectly aligned with our daily life.

To add weight to his thought on the startup IPO bubble, he explains how ubiquitous tech company Google is in India.

He throws a set of questions in order to present a fair comparison:

  • Can you imagine normal life without Google (Google Search, YouTube, Gmail and Maps), or Google Translate?
  • Is any Indian tech company as dominant as WhatsApp or Facebook, or do they have loyal customers like Apple?
  • Is there a Netflix or Tesla equivalent in India?

He continues to explain that nearly all of the US Big Tech companies have global dominance. However, when it comes to IPO-bound Indian startups, none of them have a unique offering. Also, despite being in the copy-paste business for many years, all are still struggling. Their claim to fame is their PR push, which was probably paid for by them only. And, it mainly depends on how much money they have raised from investors.

Is it possible to live with Paytm down for one day? Of course, you can. You won’t likely even notice it. Is Zomato a viable business model if there are tighter labour regulations or if and when restaurants create their own ordering apps?, asks Basumallick.

The problem is, no one wants to be tagged with a party spoiler by saying that these Indian IPOs have ridiculously high prices. Investors will be happy if they receive allotment and initial listing gain. These businesses are not here to be held by the investors for 10 years. Promoters often view floating their IPO as an exit, and instead of being a part of the long and difficult journey of building an institution.

In his final statement, Basumallick clarifies that he doesn’t obsess about valuations and believes that good things should always be expensive. 

But at the same time, he also leaves some food for thought. He openly expressed his concerns that people will be tricked into buying something that promoters are adamant about selling at a highly unreasonable price despite the fact that they have no visibility on road to profitability or sustainability without investors’ money.

I’m skeptical of the current IPO situation in India. There is a bubble. It is acknowledged in hushed tones. But no one wants to leave the party. For the simple reason that no one knows if the party is nearing its end or just beginning,” says Basumallick.

Whatever be the case, it appears that strategic investors are participating in IPO for listing gains but don’t have much confidence in most IPO-bound startup unicorns for long terms. Analysts, fund managers, and investment advisors may not be too vocal about the future prospects of these startups, but irk and concerns that are being discussed in the galore can easily be felt and heard. As many more Indian startups are gearing for their IPO in the coming weeks, it’s high time to make an informed decision, instead of participating in such IPOs out of FOMO (fear of missing out).



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