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Why new-age technology stocks will continue to bleed in 2022

Barring Paytm operator One97 Communication, most of these new-age tech stocks listed with substantial premiums on their debut on the bourses driven by near euphoric interest from first-time retail investors, who were exposed to these companies in their daily life

Mumbai / January 13, 2022 / 01:27 PM IST
Representative image

Representative image

Last year was defined by the entry of new-age technology stocks in the Indian stock market that defied conventional valuation logic. The high-growth but loss-making companies from the startup space came with hefty price tags and lucrative growth narratives.

Barring Paytm operator One97 Communication, most of these new-age tech stocks listed with substantial premiums on their debut on the bourses driven by near euphoric interest from first-time retail investors, who were exposed to these companies in their daily life. Their initial public offerings (IPOs) were subscribed multiple times, underlining the craze.

Valuation vigilantes cried foul on social media given that their discounted cash flow model was not privy to valuing companies that had never reported a profit from day one. Much of the sky-high valuations for companies such as Zomato, Paytm, CarTrade Tech and others was justified by the fact that in a low interest rate and high liquidity world, growth can be discounted far into the future.

But the turn of the year has seen the dynamic alter rapidly for loss-making technology companies.

Fed’s pivot

Close

The US Federal Reserve’s sudden pivot towards fighting inflation by pulling back liquidity and indicating multiple interest rate hikes this year and the next has weakened the case for investment in richly priced technology stocks with no near-term visibility on profitability.

In the US, many technology stocks are reeling in a bear market as investors flock from high-priced stocks to those with valuation comfort. “Some new-age companies demanded a price to sales valuation of 40-70 times during their IPOs! It is expected that as major central banks across the globe go on a rate hike cycle, exorbitant valuations in some pockets of the market cool down,” said Aditya Kondawar, COO at JST Investments.

At home, shares of One97 Communications, CarTrade, PB Fintech and Fino Payments Bank that came to the market with much fanfare are already trading anywhere between 9 percent and 50 percent below their IPO price. Shares of Zomato and Nykaa parent FSN E-commerce have sunk 21 percent each from their highs post-listing.

In the unlisted market, new-age technology startup companies waiting in line to launch their IPOs have seen substantial cuts in their price. MobiKwik’s much-awaited IPO has already been deferred as the stock’s price sank up to 50 percent in the unofficial market, dealers said.

A minor upswing in interest rates, used to discount future growth, can have a catastrophic effect on the present values of future earnings of companies. The argument becomes more pertinent in the case of companies whose valuations had swelled solely because of low interest rates and the wave of liquidity unleashed by global central banks in response to the COVID-19 pandemic.

“In a world where the tide of liquidity begins to turn, these names are likely to struggle the most,” JPMorgan Asset Management said in a recent note.

For listed technology startups, the impact of the upturn in global interest rates is not just limited to their valuation. Money managers believe many of these companies will struggle to raise capital, critical for loss-making companies to invest in growth, as investors deem them a risky proposition due to likely lower future returns.

Retail investors may suffer

Amit Kumar Gupta, portfolio advisor at Adroit Financial Services, believes that the pain in new-age tech stocks is just getting started. “You will see many of these new-age businesses dropping 50-60 percent this year,” Gupta said.

According to portfolio managers, retail investors are severely exposed to further crashes in new-age tech stocks given their enthusiastic participation in these companies’ IPO. Anecdotally, some retail portfolios are said to have 20-40 percent exposure to new-age tech companies, underlining the magnitude of the problem for such investors.

That said, Gupta believes there are some tech stocks where there are visible business moats to ensure strong growth in the future that investors could consider in the second half of 2022 when they will be available at cheaper valuations.

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.
Chiranjivi Chakraborty
Ravindra Sonavane
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