SUMMARY
Amid funding winter and listed tech stocks going down, most startup stocks in their pre-IPO stage have been on a free fall, between 35% and 80%, for the last one to two years
One of the key reasons behind these ventures deferring their IPO plans is their performance in the unlisted market, which is largely marred by their overvaluation and depleting financial health, say market experts
Legacy companies like Tata Technologies, NSE India, Hero Fincorp and Orbis Financials and others like Chennai Super Kings are doing well in the unlisted market
Covid19 may have been over for many, but the pandemic-triggered market winter has only become more intense for the world’s third-largest startup ecosystem. Additionally, uncertainties emerging from issues like the Russia-Ukraine war, fears of an impending recession, interest rate hikes by the US Federal Reserve, and other global macroeconomic factors have only worsened the situation for startups across the globe, and India is no exception.
Back home, Indian startups are not only plagued with an ongoing funding winter but also have seen the stocks of many listed new-age ventures on a downward spiral, primarily impacting the sentiments of retail investors, among other stakeholders.
A case in point is the Paytm stock, which was listed at INR 2,150 apiece on the capital markets, and was seen trading at INR 634 a share on the National Stock Exchange (as of April 17, 2023), down 70%.
Not just this, the anxiety of uncertainties in the country’s startup ecosystem is such that many startups have deferred their IPO plans even after getting the green light from the market regulator SEBI.
It is pertinent to note that as many as 11 startups either filed draft red herring prospectus (DRHPs) or received the SEBI’s go-ahead for their IPO plans while only three startups, including Delhivery, Traxcn, and DroneAcharya, have floated their IPOs since the onset of the funding winter in 2022.
Startups which filed DRHPs or received the market regulator’s approval in 2022 include Pharmeasy, Droom Technology, Navi Technology, Yatra.com, Capillary Technologies, OYO, Paymate, Go Digit Insurance, OfBusiness, and Snapdeal. Interestingly, most of these startups have withdrawn their DRHPs with SEBI while some, including Go Digit, Navi Technologies and Paymate, still intend to make their public offers in 2023, with a few addendums to the DRHPs filed or with fresh ones.
Explaining the current market situation, Piyush Jhunjhunwala, the cofounder and CEO of Stockify, a platform that allows trading in unlisted stocks said, “Despite India doing better than the rest of the world in terms of economic growth, the Indian stock market has not been performing well for the past three months in comparison to many other global stock markets. Many of the global stock markets did better than the Indian counterparts.”
He added that the unlisted market mirrors the sentiments of the capital markets, hinting that tech stocks in the unlisted market have been impacted by significant margins as tech startups continue to bleed on the bourses.
Just like Paytm, Nykaa and Zomato, most startup stocks in their pre-IPO stage have been on a free fall, between 35% and 80%, for the last one to two years. For instance, Pharmeasy which filed DRHP with SEBI in Nov, 2021, has recorded a free fall of 80%, from INR 125 in November, 2021 to INR 25 in April, 2023.
Interestingly, at a time when all is not well, legacy companies like Tata Technologies, NSE India, Hero Fincorp and Orbis Financials and companies like Chennai Super Kings, a holding company of CSK cricket team in IPL have been in high demand in the unlisted market versus new-age pre-IPO stocks like boAt, MobiKwik and PharmEasy that are struggling to woo investors.
Before diving deeper into the factors that are impacting the demand of pre-IPO stocks, let’s understand how the Indian unlisted stock market is largely run.
Unlisted Market: An Overview
Unlisted market refers to the unofficial transaction of unlisted stocks of companies that are either unlisted or have received SEBI’s approval to get listed.
Overall, there are as many as 5,312 companies listed on the BSE, Asia’s oldest stock exchange, and 2,113 companies listed on NSE, another leading stock exchange of India.
India houses almost 98K DPIIT-recognised startups and 43 Mn SMEs that remain unlisted. Therefore, the game of unlisted stocks that goes mostly unaccounted is in no way small.
“There are currently 200 brokers in the Indian market and the total transactions in the unlisted market could be to the tune of INR 10,000 Cr annually in retail,” said Jhunjhunwala of Stockify.
Manish Khanna, the founder of Unlisted Assets explained that these brokers could be classified as large and small. A lot of brokers who deal with listed shares have now started dealing with unlisted securities, too. Small brokers try to book unlisted shares based on the queries and demands they receive from their clientele.
“Large and institutional brokers usually maintain their own books and buy shares in advance. Their clientele is usually HNIs. By maintaining their own book, the buyers’ and sellers’ details don’t get disclosed,” said Khanna.
Unlike small brokers who could be focussing on more than 100 companies, big brokers focus on where the profits are concentrated. As a result, big brokers usually focus on 30-40 companies that are hyper-liquid and profitable.
Further, these brokers mostly use ESOPs and investors’ stocks to enable trading of unlisted stocks. Khanna puts the stocks available in the unlisted market in three baskets:
Most active inventory: The stocks that are frequently available and traded in the unlisted market
Pre-IPO stocks: These stocks are mostly traded during their pre-IPO timeline, when companies file their DRHPs and seek for a pre-IPO placement
Inactive stocks: The stocks that are mostly dead but could become active due to specific reasons
“Further, these stocks could be highly or very less liquid. Brokers keep the inventory accordingly. And, if the market is volatile, obviously, nobody would like to keep the inventory on their books,” Khanna said.
The Plight Of New-Age Stocks In The Unlisted Market
Most of the existing tech startup stocks are pre-IPO in nature and are struggling to maintain their reputation in the unlisted market.
Mobikwik, boAt and Pharmeasy have already postponed their IPO plans, while there are reports of Mamaearth going down the same path — although the company declines the same.
One of the key reasons behind these ventures deferring their IPO plans is their performance in the unlisted market, which is largely marred by their overvaluation and depleting financial health.
Avoiding getting into the fine prints of the startups named in the aforementioned graph, Khanna said, “The reason is basically what we foresee is the valuation disagreement. So, if you actually are looking for X and I’m offering something available at Y, there is a big mismatch.”
“The problem with these startups is that their primary rounds happened at much higher valuations and now the secondaries are happening at a deep discount of 40%-50%. Even though there is a 20%-25% discount available, investors don’t want to take a hit of over 50%,” Khanna added.
As a result, institutional deals have declined, impacting volume and eventually IPO plans of many startups. A lot also depends on the company’s financial health and its valuation – both or even one of the two, say market experts.
If you will refer to the graph above, you will find that despite being profitable for three consecutive years, boAt’s stock price in the unlisted market has currently fallen to INR 800 from INR 870 last year. This is mainly because investors feel it is overvalued. Initially, boAt had reportedly planned to go for an IPO at a valuation of around INR 15,000 Cr against grey market’s valuation of INR 11,000 Cr.
Now that boAt has raised INR 500 Cr at INR 11,470 Cr, it may perform better, believe experts.
However, in the case of Pharmeasy, experts believe that it has already hit rock bottom and will go only up from its existing share price of INR 25.
“Ixigo is expected to deliver 5X growth post-Covid 19 recovery in the travel sector. It is also expected to deliver profitability in FY23 as it is already cash flow positive. The share price is already in recovery mode and has, in fact, recovered by around INR 40 in the last three months, thanks to all the positive news. This could go higher,” said Jhunjhunwala.
Given that startups aren’t selling like hotcakes in the unlisted market, Jhunjhunwala sees limited volume trading, besides their overvaluation, as a key reason.
“Very limited volume trading is happening in the unlisted market in startups like Razorpay, Ola, BluSmart, BYJU’S, ClearTrip, Go Digit insurance, etc. as they are mostly held by promoters & big private equity/VC firms and limited stock is available to buy/sell in the unlisted market.”
“Many of these companies also have a lot of restrictions on share transfer in the private market (like ROFR) and also many company shares are held in physical form, which makes it difficult to trade due to the complex process of share transfer,” Jhunjhunwala added.
So, Who’s Ruling The Roost In The Unlisted Market?
At a time when startup stocks are feeling the heat even in the unlisted markets, there are corporates that have investors’ attention as they are seen giving decent returns.
Some of the companies that are currently on a roll in the grey market are Tata Technologies, NSE, CSK and Hero Fincorp.
Speaking about the high demand of these shares, Jhunjhunwala said that there are various reasons that have put these stocks on an upward spiral.
While the latest fundraising round worth INR 100 Cr and investments by ace investor Ashish Kacholia has helped move Orbis stocks from INR 69 to INR 82 in the last one year, Tata Technologies’ IPO news has bloated its shares from INR 550 in April 2022 to INR 800 in April 2023.
Similarly, CSK’s high volume trading is being witnessed due to expected future earnings of INR 2,500 Cr+ in the next five years due to a fair share of media sponsorship revenue from BCCI and a 100% jump vs the last five years. The company’s valuation is also quite reasonable at current prices of approx. INR 170 per share (m-cap INR 5,200 Cr). In the last three months, the price has moved from INR 150 to INR 170 levels, he explained.
On Hero Fincorp, Jhunjhunwala said that the high demand is mainly due to its recent round of funding ($267 Mn) from Apollo Management US-based PE firm and Hero MotoCorp, and its collaboration with Cashinvoice to provide supply chain financing to MSME in India. Further, the company’s claims of achieving 47% revenue growth in Q3 FY23 has also helped it increase its price in the last three months — from INR 680 to INR 980.
Given the stark contrast, the question that arises is: Can tech startups strike the right balance between their valuations and performance?
If done well, the move could be a win-win for all – VCs, retail investors, and founders — before they [the startups] make their stock market debut. Else, deferred IPO plans, followed by a deep discount of 40-50% per share, will continue to impact investor sentiment amid an already-jittering startup economy.
Update | April 21, 2023 3:30 PM
