In the recent past, IT Sector stocks and New Age Tech Business stocks like Zomato, Paytm, etc are on a downfall journey. What are the reasons behind such a sharp fall in these stocks and what should investors do amid this kind of situation? Let’s discuss this all in the article as we move forward.
Why New Age Tech Businesses Stocks are falling?
- Some of the new age technology businesses which have tumbled in the recent past are:
i) PB Fintech (Policy Bazaar) which has fallen by 40% from its 52-week high which is from Rs. 1470 per share to Rs. 780 per share
ii) Paytm is down from Rs. 1,961 to Rs. 846.5 per share which is down by almost 57%
iii) Zomato down from Rs. 169 to Rs. 78 per share i.e., around 54% from the 52-week high levels
iv) Nykaa has gone down from Rs. 2,574 to Rs. 1,558 per share amounting to almost a loss of 40% from its 52-week high levels
v) Cartrade is down from Rs. 1,618 to Rs. 612 per share, down by more than 62% from its 52-Week High Levels
- Here, the right valuations of these businesses are the major problem with the business. One cannot easily find out the intrinsic value of these businesses.
- There are several reasons why we cannot value these companies exactly as before these loss-making companies were not listed on stock exchanges.
- The companies which were listed, their balance sheet, and P/L were easy to understand as we use to get how their business model was working, how they might grow in the future, what all plants and machinery they had, mostly like textbook assets and liability B/L sheet which can be understood and make our calculations but these things are not available here to make somewhat predictable and probable valuations, but these are disruptive businesses.
- Now before listing these companies, investors which use to invest in these companies were Private Equity players, which have cleaned their hands by selling their stake and left.
- Now the reality check is that we cannot know with certainty which out of the new tech companies will be a multi-bagger. There might surely be one or two multi-baggers out of these companies but finding which one is the biggest problem.
- Why finding it is so hard because when we do intrinsic value calculation, we use the DCF method by discounting the future cash flow which is not available in these companies at the current stage as these companies themselves tells they might generate positive cash flow in 2024 or later (which is again subjective).
- These predictions or the forecast these companies are making sentiments of the investors quite nervous.
Why PB Fintech Stock is Falling?
- The promotors of the company Mr. Dahiya and Mr. Bansal are selling stocks worth Rs. 1000 Cr. of Policy bazaar.
- The reason promotors have given for selling this stake is that majority of the wealth of these promotors comes from ESOP which when they get, they have to pay heavy advance tax. For payment of this tax, they said they have to sell these shares.
- Firstly, the share price is under pressure for various reasons, now if promotor is also selling their stake, this sends a negative signal.
- Now this is understandable that they might have to pay tax or they might have individual goals which they want to fulfill but this is a negative sign for the reasons they have stated.
- They did have a second option for the problem which is by pledging the stake and raising the money which might have given some comfort to the investor that they have pledged the shares for some reason and not sold it off completely which might have been a long-term process.
- This is a reality check for new tech companies, especially which are getting listed. Before listing these companies use to raise money from Private Equity funds where the number of rounds of the fund could be raised depending on the valuation of the company at a given point in time.
- If this stake would have happened at that time this sudden drop might have not taken place but when a company is listed and if any such news comes which the market feels is not positive, it penalizes the company by a selloff.
- The secondary market will decide what will be the valuation of the company depending on various factors and it will not be the same as the PE fund or some other investor valuation perspective which only comes into play when the company wants to raise the funds.
Reasons behind fall in IT Sector Stocks:
- The Nifty IT Index has generated returns of over 60% in the last 1 year before the recent fall in the Nifty IT Index.
- The Current PE Ratio of the Nifty IT Index, then it is around the level of 35 times, but the average PE of this index in the last 3 and 5 years is around 27 and 23.44 respectively. The average PE of the last 1 year is 33.
- Requirement of Technology has boomed due to the Covid-19, were in a simple case scenario the things which were going to happen in the coming 10 years has happened at once in the last 1.5-2 years for which all the credit goes to Covid which brought technological transformation at such a quick pace.
- Also, in IT Sector generally, there were not many salary hikes, but since 2021 the company has started giving salary hikes of about 50% to 200% whether it has come from churning or retaining of employees.
- These significant salary hikes among the employees of the IT sector have also led to a contraction in the margins of the IT Companies.
- Another reason here could be the cascading impact of the tumbling of foreign technology stocks like Facebook, etc.
What Should Investors Do?
Only those investors who are aggressive investors plus those who understand these businesses properly with the risk associated should invest in such businesses. Don’t fall prey to the new hot thing to invest in the market, you must understand this business first and forecast at least some tangible thing out of it and then invest. On the IT Sector front, one should only expect a lower double-digit return. Also, the premium valuation of IT Sector stocks is getting rationalized. The important factor one should always need to focus on is earnings visibility and growth in earnings. Follow a staggered manner of investing and should avoid any lumpsum investment at this point.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.