Surprise corporate actions by Indian tech darlings spur scrutiny

While within the rules, experts not convinced by buyback move of fintech firms

The relentless rout in shares of home grown technology start-ups since their much-hyped initial public offerings (IPO) 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, the owner of beauty e-retailer Nykaa, which announced a bonus share issue to coincide with the expiry of an IPO lock-up on key investors in November that risked extending the stock’s slump. Then this month, Paytm somewhat baffled investors with a decision to buy back shares a little over a year since its 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. After all, Nykaa and Paytm are among a flurry of hot start-ups that came to the Indian market with much fanfare. Their disastrous performance since listing has prompted some key backers to trim holdings while horde 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, these consumer-facing technology start-ups 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.
 

“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.
 

Reliance Power
 

Sekhar compared the recent corporate actions to what followed the listing of Reliance Power — 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 per cent above its current price while the consensus for Paytm is a return potential of 65 per cent, data compiled by Bloomberg show.

Paytm also has a ‘buy’ or equivalent ratings from eight out of the 12 analysts tracking the stock, the highest number of such calls since its trading debut.

All Hype

• The actions show an obsession that newly listed firms have with their stock prices, say experts 
• Nykaa and Paytm are among a flurry of hot start- ups that came to the market with much fanfare 
• Companies should instead try building confidence about their business models, says an expert 
• Sell-side analysts seem to be turning more sanguine about the prospects of a recovery