Rs 40 Lakh A Share! Unicorn Stocks Get Supernatural Valuations In Unlisted Market

 

Despite the disruption caused by Covid-19, the Indian startup ecosystem is adding more names to the list of unicorns. Even in the pandemic-hit year, eight firms – namely Postman, Nykaa, Unacademy and Razorpay – have made it to the Elite Club even as the strictest and longest lockdown in the globe shook up the world’s third largest startup ecosystem. Some estimates suggest India is on the way to have 100 unicorns by 2025.

But shares of these domestic unicorns and startups with David-sized earnings are already trading at Goliath-sized valuations in the unofficial market for trading in unlisted shares, or the so-called grey market.

The per share value of some of these companies have hit unimaginable levels. Oyo Rooms is trading at astronomical value of Rs 35-40 lakh a share. Food delivery and restaurant aggregators Swiggy trades at Rs 2.7-2.8 lakh and Zomato at Rs 3.10 lakh per share.

Insurance unicorn Policy Bazaar is demanding Rs 7-7.5 lakh a share, while a single share of cargo service provider Rivigo trades at Rs 2.8 lakh. All these businesses are valued between $1-10 billion.

There are projections that India will witness at least 10 IPOs from internet companies over the next 3 years, and Swiggy, Unacademy and Rivigo are among the names doing the rounds.

Valuation Bubble?

A lot of HNI and ultra-HNI investors are flocking to these counters, hoping to make a killing when these businesses go public in the foreseeable future. Many of them are simply unaware, or unmindful, of the challenges the unicorn space faces in terms of value fluctuation and limited liquidity.

Rajesh Singla, Founder and CEO of Planify, said traditional businesses value themselves on various matrices such as EV/Ebidta, price to book value or price to earnings ratios, whereas new-age entities earn their valuation on different parameters. Thus, one should not compare them with their listed peers.

“One should not look at the share price in lakhs, as the companies keep diluting prices by splitting shares or issuing bonuses,” he said. “These stocks are not meant for retail investment at this stage.”

There are different ways to value such startups, where customer base plays a key role, as they usually operate with negative cash flows. The way of doing business is entirely different in the case of unicorns and startups.

“Even if these companies are not making any profits, their valuations surge as their burn rate remains constant. The companies, which fail to sustain it, opt for alternatives like buyouts or merger and acquisitions,” says Manthan Mehta, Head of Unlisted and Private Equity, Rurash Financials.

Due to rapid digitisation, survival will be tough for many of these stocks. As the market consolidates, only a few strong players in every sector are likely to survive and make money.

“The work culture is differentiated in the western world, as they eye profit from the beginning of the operations, while Indian unicorns need constant push from investors,” said Singla.

Analysts said unicorn businesses that move over their core businesses and try to over-diversify portfolios are more likely to take a hit. “New-age businesses try to disrupt existing market with new and innovative strategies to acquire market share at a very high rate,” they said.

The contrarian view

In the Covid-hit economy, new-age businesses have either been hit hard or have found their way to navigate the crisis. Thus, a few of analysts have a different view on their tactics.

Sandip Ginodia, CEO, Altius Investech, said share valuations may fall at a gradual or faster pace, if the cash flow breaks. “Value destruction is always faster than construction,” he said.

Every business needs a support system to survive and may die in absence of that support. There is no proper timeline for such businesses to turn profitable. Thus, the risk involved is very high.

“We focus on bottom-line of a company. Covid-19 has disrupted the business cycle of other businesses as well, but they are making profit,” Ginodia said. “We do not advice investors to make hefty investments in non-profitable entities.”

How to look at them

Market veterans say the key success element in a startup is execution capability of the entrepreneur. Most startups fail because of bad execution, even if the idea is great.

Ashish Chugh, Director of Hidden Gems Advisory, said risk management is top priority for an investor in startup investing, and the way to go is by negotiating the valuation and also an exit strategy.

Most of the startup investing is in the unlisted space, and there are very few options in the listed space. “There may be opportunities available, though very limited,” says Chugh.

“In many cases, a startup firm is a subsidiary of the listed company,” says the Delhi-based value investor. “Valuations are more reasonable in the listed space than in the unlisted space, and liquidity concerns are less too.”

Sandip Ginodia , CEO

ALTIUS INVESTECH PVT LTD

We deal in over 60 unlisted companies with 15 years of experience 

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