There are likely to be fewer new-age technology and internet companies launching IPOs this year because there appears to be a disconnect between their private valuations and what the public markets would be willing to pay, according to Bhavesh Shah, MD, Investment Banking at Equirus Capital.
“I think there are a lot of companies that are good, IPO-worthy but there’s a big disconnect between what a private valuation could be and whatever public market valuation can happen,” Shah told businessline in an interview. He added that there will be far fewer IPOs of internet companies compared to the last 3-4 years. “Not everybody will be able to go for an IPO.”
During the years 2019 to 2022, new-age technology companies emerged as public market leaders, accounting for about a fourth of the capital raised by large IPOs such as Zomato, Nykaa, and Paytm. In 2023, that dwindled to just 2 per cent.
Along with sound business models and growth, new-age companies also have to be profitable and show the potential to scale up those profits, Shah said. Excerpts:
IPOs of internet companies were all the rage just a year ago. Now there is more caution in bringing them to the market. Do you expect this trend to continue?
Of course, there are a lot of companies out there that want to tap into the capital markets. But they need to be profitable. Out of, say, 1,000 internet companies, there will be just 50-60 who can change their business model to make themselves profitable. They raise equity and use that to give discounts and increase sales. They then raise more equity at a higher valuation and grow further through discounts. The test of that business model will be if they are able to transition into profits. It is easy to raise money, but becoming profitable, it will be a far lower number. A lot of these companies will, I think, just evaporate, get merged, or be acquired. That’s already happening. Over the last one year we have seen employment cuts in some of these companies.
Number two, a lot of their private valuations have been unrealistic. If a company has revenue of ₹5,000 crore, makes a loss of ₹8,000 crore, and the valuation is $22 billion, it beats all logic. That mismatch is there. Investors now want companies to make profits. Also, if it has to be made public, there has to be a mark down in valuations. There are a lot of companies that are good, IPO-worthy companies, but there’s a big disconnect between what a private valuation could be and whatever public market valuation can happen. That has to come down.
So the number of internet companies going to the market will be low?
Far lower compared to the number of companies that have been able to raise money in the last 3-4 years. Not everybody will be able to go for an IPO.
You spoke about the ability to scale up profits. Could you elaborate on that?
If I have the conviction that in the next one or two years the profit is going to be scaled up to a good number, then I can do an IPO. For example, there were some companies which we took public, and their profits were very low because of COVID. But then we were looking at the business model in a non-Covid scenario. When it is back to normal, can we see a profit which is scaled up? If we have the conviction, then we will do the public issue.
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Published on February 22, 2024
