Paytm, Nykaa: Will 2022's bloodbath in new-age stocks continue in 2023?

After a dismal 2022 that saw their stock prices crash between 41 per cent and 60 per cent, most analysts still remain wary of stocks of new-age companies from a one-year horizon. They suggest investors remain selective and opt for stocks of companies that have strong management and a definite roadmap towards profitability besides being capital efficient.

Among the lot, the board of One97 Communications – the parent company of Paytm – met on Tuesday to decide the quantum of share buyback amid a steep correction in its stock. Analysts believe the company's decision to go for such a move seems to have been taken to support the stock, which crashed 74.9 per cent from its issue price in less than 13 months.

"Typically, a company goes for a buyback if it is having positive cash flows and there are no foreseeable opportunities to improve the return on capital employed. But that's not the case with Paytm. Thus, this buyback as well as Nykaa's bonus issue seems to be manipulative," said Ambareesh Baliga, an independent market analyst.

Also weighing on the stock performance of these new-age / internet companies is the rising cost of capital amid falling profitability and steep valuations. Most internet / information technology (IT) stocks had a forgettable 2022. At the global level, the NASDAQ lost around 29 per cent in 2022, with Facebook, Apple, NVIDIA Corp., Google and Microsoft Corp, popularly known as the FANGMAN stocks, down in the range of 21 per cent to 66 per cent  during this period.

Back home, Paytm, Policybazaar, Zomato, and Nykaa have been the worst hit, falling between 50.5 per cent and 60 per cent thus far in 2022. The Nifty IT index slipped 24 per cent in 2022, data showed as a sell-off in stocks of tech / new-age companies gathered steam globally. In comparison, the S&P BSE Sensex and the Nifty50 indexes moved up around 7 per cent during this period.

"I don't expect Delhivery and Policybazaar to fall in 2023. Rather, they may rise from here on. Paytm, meanwhile, could fall another 15-20 per cent in the upcoming calendar year, while Nykaa could remain an underperformer among the lot," said Ambareesh Baliga, who believes new-age stocks should be lapped up only by serious long-term investors.

The steep valuation of some of these stocks – even after the sharp correction from their peak levels – remains a concern. Kislay Upadhyay, smallcase manager and founder of FidelFolio Investments, for instance, said the earnings growth trajectory of these stocks does not justify their valuations

"Zomato posted its second highest consolidated net loss of over Rs 1,200 crore in fiscal 2021-22 (FY22) and has a market capitalization (market-cap) of Rs 55,000 crore. It needs an annual profit of Rs 2,000-3,000 crore to justify the current valuations. Nykaa, which is slightly profitable, has a market capitalisation of around Rs 50,000 crore. Its profit needs to be 50x the current reported profit for the valuations to be merely justified," he added.

While Upadhyay of FidelFolio Investments prefers EasyTrip Planners from the pack, ICICI Securities has upgraded Delhivery to 'Buy' from 'Sell' with a one-year target price of Rs 460. It believes risk-reward at current market price is attractive.

HDFC Securities, in a November 2 report, initiated coverage on Nykaa with 'Sell' rating as it expects return ratios to improve from FY25.

"Nykaa's success was in-part is due to the absence of potent competitors, which is gradually changing. Ex-ad income, lack of non-linear monetization levers forces us to realign our valuation compass somewhere between a linear business and a pure platform. We have a target of Rs 800," it said.