The intense sell-off in shares of online food aggregator Zomato and online insurance distributor PolicyBazaar is also proving to be calamitous for one of their investors – Info Edge India.
The operator of platforms like Naukri.com and Jeevansathi.com has seen its stock nosedive more than 40 percent from its record high of Rs. 7,465.4 hit on October 19 because of a similar decline in shares of investee companies like Zomato and PB Fintech.
Info Edge holds a 15.23 percent stake in Zomato, which at the peak of the latter’s stock price was valued at Rs 20,190 crore. However, the value of the stake has plummeted to Rs 11,032 crore in three months as Zomato’s shares fell 45 percent from the top.
Similarly, the value of Info Edge’s stake in PB Fintech, parent of PolicyBazaar, has tanked from a high of Rs 8,803 crore just days after its listing in November to Rs 4,896 crore as the latter’s shares cratered 44 percent over the past two months.
The selling in shares of companies like Zomato and PolicyBazaar has been triggered by the surge in global and domestic bond yields that has made their valuations richer than what their fundamentals dictate.
Both the companies’ valuations at the time of their initial public offerings in 2021 were already perceived to be too high yet investors at the time were comfortable given the scorching pace of growth and the low-interest-rate environment.
Low-interest rates, used as a discount rate in many valuation models, increase the net present value of cash flow that could materialize very far into the future and therefore, increase present-day valuations. On the other hand, a slight increase in interest rate can lead to a magnified decline in the net present value of those future cash flows.
With the US Federal Reserve expected to raise interest rates by as many as four times this year and US 10-year bond yield, used as discount rate by global investors, inching towards 2 percent, investors are cutting down on exposure to such high-growth, high valuation companies.
The compression in valuations of growth companies due to the rise in bond yields is also an additional factor in the decline of Info Edge given that investors had boosted the stock because of its high growth Internet platforms.
“There is a risk-off situation across the globe amid fear of tightening by the US Fed where if we look at the trend then there is a sharp sell-off in growth stocks (new edge businesses) especially loss-making companies,” Santosh Meena, Head of Research, Swastika Investmart.
What should traders do?
The decline in the five sessions including today has been helped by higher volumes in the stock. The average volume of the previous five sessions is 180 percent higher than the average volumes of the previous nine coupled with high deliverable quantity of shares.
Ruchit Jain, a technical analyst at Angel One, said that any pullback in the stock is likely to attract more selling pressure as the stock is likely to head towards lows of around Rs 4,200 in the short-to-medium term.
“One should avoid taking contrarian bets on the stock unless the price action changes with higher volumes,” Jain said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.