In 2021, a number of digital majors such as Zomato, Paytm, and Nykaa made their stock market debut only to see their shares tumble soon after listing. Investment bankers who managed the high-profile mega offerings say that the public markets are focussed on profitability, and with no profits or even a path to profitability in sight, the shares took a beating.
Now, with the mega IPO of Swiggy all set to hit the markets, the debate around profitability has once again come to the fore, with investment bankers changing their tune slightly. The bankers who were harping on the path to profitability in 2021, are now saying that digital majors need to ensure clear visibility of profitability in two to three quarters post-listing.
“Earlier, tech companies used to list with no clear path to profitability. Now they need to ensure that profitability is at least visible in the next two to three quarters,” said an investment banker on condition of anonymity as he is managing a few IPOs of digital majors.
Take the case of Swiggy, whose Rs 11,300 crore IPO will open on November 6.
In terms of the bottomline, Swiggy reduced its losses for FY24 to Rs 2,350.2 crore, from Rs 4,179.3 crore in FY23. Further, revenue from operations grew by a robust 36 percent to Rs 11,247.4 crore in FY24, up from Rs 8,264.6 crore in the previous fiscal.
In Q1 FY25, the company reported a loss of Rs 611 crore, which widened slightly from Rs 564 crore in the same period of the previous fiscal. However, quarterly revenue surged 35 percent to Rs 3,222.2 crore.
Companies have raised funds from private investors at high valuations, and when the company goes public, it might not be able to get the same valuation. In this case, the there should be something on the table for investors to make money, said Bhavesh Shah, Managing Director and Head of Investment Banking at Equirus.
He added that in private markets the valuations were high because public markets give a lot of weightage to profitability however in private markets it used to be growth at any cost.
“Unlike now, the market conditions were not that positive for tech companies which listed earlier. The stocks of most such companies performed poorly after listing, but recovered within a year as the firms started showing signs of profitability,” said another investment banker who has been part of several tech IPOs.
Consider Zomato, for instance. Since its listing in July 2021, the stock lost nearly 63 percent over the following year before rebounding. At the time of its listing, Zomato was a loss-making company and did not turn profitable until FY24, when it reported a net profit of Rs 351 crore. Zomato's net loss narrowed from Rs 1,222 crore in FY22 to Rs 971 crore in FY23.
Paytm shares also encountered similar challenges, losing around 50 percent from the time it listed in November 2022. The company has been accumulating losses in its balance sheets, and reported a net loss of Rs 682 crore in FY24.
Nykaa shares have also struggled to recover. The company debuted on the bourses in December 2021, and since then has lost 54 percent. However, unlike Zomato, Nykaa was already profitable when it went public, yet its share price faced significant pressure. It posted a net profit of Rs 40 crore in FY24.
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