Moneycontrol Pro Panorama | OYO IPO — a test case for new-age companies

SEBI asks Oravel Stays (Oyo) to refile its IPO papers with applicable details. (Representative image)

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After clearing several new-age companies' IPOs during the primary market bull run in 2021, SEBI woke up when their prices started taking a beating. If one has to pick a company that caused SEBI to wake up from its slumber, it has to be Paytm.

The company offered its shares to the public in a band of Rs 2080-2150 but got listed at a discount and the stock price has since been slipping. The company’s shares are changing hands at Rs 535.

SEBI had to draw a lot of flak for not highlighting the valuation concerns in the company.

Since then, the market regulator has tried to get its act together. It came out with a discussion paper on disclosures by such companies.

The solution sought by SEBI is more transparency in terms of the pricing of IPOs. The regulator wants new-age tech firms to explain in detail the rationale behind pricing their issue by comparing it to pre-IPO share sales, publishing all pre-IPO investor presentations and giving details of what it calls Key Performance Indicators (KPI).

SEBI rightly deduced that current valuation parameters like earnings per share (EPS), price to earnings (P/E), return on net worth (RoNW), and net asset value (NAV), as well as comparisons of these accounting ratios with their peers, are useless when it comes to new-age companies. This is because most of them have been loss-making and may continue to do so for a long time.

Now, SEBI has a test case in front of it. The market regulator has asked Oravel Stays (Oyo) to refile its IPO papers with applicable details.

Oyo filed its Draft Red Herring Prospectus (DRHP) with SEBI in September 2021 for its Rs 8,430 crore IPO.

While SEBI has not mentioned the reasons for refiling in its notification, media reports say that SEBI has asked Oyo to update its risk factors, its KPIs, outstanding litigations and the basis for valuation in the company’s DRHP.

But will additional information from Oyo help in justifying the valuation? SEBI in its discussion paper acknowledged that new-age technology companies generally remain loss-making for a longer period before achieving break-even as these companies in their growth phase opt for gaining scale over profits.

An investor with a private equity mindset is best suited for such companies. Investing in startups is a completely different ball game, and even seasoned fund managers stay away from them. The segment is for private equity players who have the sector understanding, enough capital to de-risk their investments and most importantly, patience to allow the company management enough time to prove themselves.

Most retail investors do not have any such traits, they are looking for short-term post-listing gains.

All new-age tech IPOs of 2021 disclosed the fact that they are loss-making and may continue to do so. In such a case, valuation becomes difficult using conventional tools. However, analysts from some broking firms justified investments in these issues projecting numbers 25 years forward, trying to capitalise on the IPO frenzy. Additional data in their hands are giving them more tools to be creative in their deductions.

In the Oyo case too, SEBI is trying to hide behind data, which a retail investor will never understand.

There is no need for SEBI to be over-protective when companies themselves are disclosing that they are loss-making and will remain so for a while. An investor who is willing to understand the risk and pay the IPO premium can do so.

In the final analysis, the market will decide if the premium charged by the company is justified.

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Shishir AsthanaMoneycontrol Pro