Indian start-ups feel the heat of global technology-driven sell-off

Barely two months ago, new-age stocks were the toast of the markets, with investors willing to pay top dollars for companies with no profitability in sight. However, with rising cost of capital amid prospects of the US Federal Reserve raising interest rates and reducing its balance sheet size, those bets have started unravelling.

Shares of the handful of start-ups listed on the domestic bourses have come off sharply from their record highs. In this they’re tracking the global technology-driven sell-off as investors reassess the valuation multiples of these stocks.

Last year’s ultra-low interest rate regime made holding these stocks – which are expected to generate profits sometime in the future – attractive. However, with the 10-year US Treasury and yields on most global funds inching up amid inflation concerns, investors have started to dump these stocks.

This rotation out of growth stocks has pushed the tech-focused Nasdaq 100 index in the US into “correction” territory. The index is down 13 per cent year-to-date. If one creates an index of domestic tech start-ups, the gauge would have recorded an even sharper fall. About eight stocks that can be included in the category have fallen an average 40 per cent from their all-time highs.

“Valuation does matter. Especially when the rate cycle turns unfavourable. Our Indian new-age companies are nothing but old economy businesses with an app and easy money. These flaky business models won’t age well,” said Shankar Sharma, co-founder of First Global.

Shares of food delivery start-up Zomato on Monday crashed nearly 20 per cent to end at Rs 91.4 apiece. Its stock is now down 46 per cent from its record high and only 20 per cent above its IPO price after rising as much as 2.2 times. Insurance aggregator PolicyBazaar (PB Fintech) now trades 47 per cent below its all-time high and 21 per cent below its IPO price. Others like Nykaa, Rategain Travel, Cartrade, and MapmyIndia have also seen their stock prices drop between 25 per cent and 52 per cent in recent weeks. This trend marks a shift in focus from a growth-at-any-cost strategy to a more realistic approach, where investors pay more heed to sales, cost and profitability projections, say experts.

“We do not invest in firms with no visible profitability track record but we do occasionally sell-short. Under a completely different pricing, they could be interesting investments. It should not be lost on anyone that Amazon fell over 94 per cent during the dotcom bust and was obviously a great bargain trading at $5.97 per share in September 2001. So, while an investment in recently started businesses or loss-making businesses is highly unlikely, we recognise the importance of keeping an open mind and trying to understand the other side of the market,” said Lauren Templeton, founder and president, Templeton and Phillips Capital Management.

“New-age companies are fast growing companies with cash flows in the very distant future. These are in a sense extremely long-dated equities. In cases where the market believes in the business idea, the founders/management and unit economics are established the valuation can be lofty, particularly in the backdrop of current liquidity conditions. Investors can selectively participate in the space from a long-term perspective,” added Saion Mukherjee, managing director and head of equity research, India, Nomura.