Paytm, Nykaa: Surprise Corporate Actions By Indian Tech Darlings Spur Scrutiny
The relentless rout in shares of India’s tech darlings since their much-hyped initial public offerings last year has driven some of them to use surprise tactics to arrest the slide, drawing scrutiny from investors and market experts.
(Bloomberg) -- The relentless rout in shares of India’s tech darlings since their much-hyped initial public offerings last year has driven some of them to use surprise tactics to arrest the slide, drawing scrutiny from investors and market experts.
First it was FSN E-Commerce Ventures Pvt., the owner of beauty e-retailer Nykaa, which announced a bonus share issue to coincide with the expiry of an IPO lockup on key investors in November that risked extending the stock’s slump. Then this month, the loss-making parent of payments firm Paytm somewhat baffled investors with a decision to buy back shares a little over a year since its Mumbai listing.
While within the rules, several market experts say these actions show an obsession of sorts that newly listed firms have with their stock prices. Afterall, Nykaa and Paytm are among a flurry of hot startups that came to the Indian market with much fanfare. Their disastrous performance since listing has prompted some key backers to trim holdings while hoards of retail investors have taken to social media to voice their disappointment.
“I am not in agreement with the methods used by some of the newly listed companies to improve or sustain value of their capital,” said Shyam Sekhar, founder of ithought Financial Consulting LLP in Chennai. “I see these methods are expedient in nature.”
Boosted by gush of global liquidity, India’s consumer-facing technology startups witnessed strong investor appetite amid a booming local IPO market last year, despite questions over their profitability and valuations. The worldwide meltdown in the tech sector then triggered their share collapse.
Touted as India’s largest-ever IPO at the time of its listing last November, Paytm’s stock lost 75% of its value in the first year, making it the world’s worst-performing large IPO in a decade. The stock jumped 7.2% last Friday following the announcement of a share buyback plan. It is down almost 3% so far this week.
Nykaa, led by former investment banker Falguni Nayar, almost doubled on its listing day late last year, but has since been falling. Last month, the stock climbed about 18% over two days after the company allotted free shares to shareholders just as an IPO lock-up expired. Those gains are all gone now.
“The decision of the buyback has been taken after an in-depth review and detailed deliberations of our projected investment requirements to drive long-term value creation,” a spokesperson for Paytm wrote in response to emailed questions. “Paytm continues to grow despite the headwinds that have impacted major stocks globally.”
Nykaa didn’t reply to an email seeking comment.
Sekhar compared the recent corporate actions to what followed the listing of Reliance Power Ltd. — one of India’s most-hyped IPOs — back in 2008. The firm issued free shares to investors within days of its trading debut, but the move turned out to be short-sighted.
“Companies should instead try building confidence about their business models, communicating with shareholders about their efforts to improve businesses,” he said.
To be sure, sell-side analysts seem to be turning more sanguine about the prospects of a recovery. The average 12-month price target for Nykaa is 48% above its current price while the consensus for Paytm is a return potential of 65%, data compiled by Bloomberg show. Paytm also has buy or equivalent ratings from eight out of the 12 analysts tracking the stock, the highest number of such calls since its trading debut.
“It will be unfair to say the two companies are not focused on building their business,” according to Rakhi Prasad, an investment manager with Alder Capital. Investors in India are still learning about consumer technology companies’ business models, which is why many investors, even few institutional holders, are ignoring improvement shown by them on monthly operating metrics, she added.
Paytm is on track to break even on adjusted operating profit basis in the second quarter of the next fiscal year and will burn about $33 million before achieving the milestone, according to JPMorgan Chase & Co. analyst Ankur Rudra wrote in a note.
Still, questions remain on the rationale of these moves, especially as their impact on stocks seems to be fleeting.
“The companies look more concerned about their falling stock prices and this in a way tells us that they got their valuations wrong when they debuted the markets,” said Aditya Shah, chief investment officer at Mumbai-based JST Investments Pvt.
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