There is a time to stay private. There is a time to go public. The post-pandemic era is one that has encouraged the latter. Companies across the globe have gone public in a rather frenetic manner over the last 11 months this calendar year. A Bloomberg report suggests that IPOs across the globe have breached the $600 billion mark, with just about a month and half still left to close the year. Nearly 3,000 businesses across the world have gone public, gobbling up investor interest and money with a frenzy never seen before.
India equally represents a part of this frenzy with its own vigour. The recently listed One97 Communications (parent brand of Paytm) emerged as the country’s largest-ever IPO with $2.47 billion, beating the public sector Coal India’s IPO of 2010 hollow.
While the Paytm parent IPO was India’s largest ever, it was one of the most disappointing one as well (from the perspective of investors, of course). The numbers are revealing in their own way. The issue price stood at Rs 2,150. A month before its listing, the grey market was trading the stock at Rs 2,300; a day before listing, it changed hands virtually at Rs 2,125, got listed at a 9% discount price of Rs 1,950 and closed listing day at a 27% discount. This meant that investors in the IPO, which largely included FIIs and domestic retail investors, had a haircut and a shave and more to the tune of Rs 1,000 crore plus. This represented a big drop on listing day in the fortunes of all those who got in first. Those who bought in at closing time on listing day or later seem to have done it right. More or less. The Paytm stock apart, several key questions arise. And this is not about the brand at all. In many ways, it is about all the other IPOs the world has seen debut this year, and indeed about all the ones that are lined up to happen ahead.
How solid are our IPOs? How much hype is in them and how much reality? What drives valuation? Does one buy into an IPO based on its current or proposed value? And who paints this dream of what’s ahead? Is the valuation of what’s ahead based on a discounted cash flow system? Or is it based on a premiumised cash flow fantasy? Who puts this premium out there? Who tracks it? Have IPOs and their valuation gone rogue, pricing every IPO at its apogee point, rather than a more realistic win-win point for both investor and company alike? And will this yen erode the credibility of future IPO valuations? Has the damage already been done?
Retail investors will ask these questions less than hard-nosed FIIs, HNIs, corporate investors and domestic institutional investors. As all these questions are raised once again and answered, there is plenty of work to be done by start-ups and unicorns who want to list in the future. Importantly, the key point to understand is the fact that listing is a point of ultimate reality in many ways. The market, with its many rustic ways of evaluating a stock, knows it best. What it says might be wrong at times, but that is the reality. Reality bites a stock on listing day. Listing a blazing hot start-up on the stock market is quite like taking a piping hot pan off the stove and putting it suddenly under a tap of cold water. The pan will sizzle furiously for a very short while, and then it will be business as usual, without the hype and heat. The market has a way of cooling it all.
A typical start-up has many avenues to fund itself. At various points of time it uses different ways of keeping it going. In the beginning, it is bootstrapped. And then, one starts diluting stake for valuations that represent different stages in the journey of the start-up. Most move from debt to equity. Every successive round of funding finds a better valuation, signifying a better business milestone as well. And the rounds of funding go on, with investors of a bigger and better calibre coming in with every successive round. The business grows both physically and virtually.
The physical growth is all about the number of customers it touches, the kind of billing it brings in, the kind of repeat transaction it depends upon and the metrics that are real and solid. The virtual growth of the start-up is the brand imagery it commands. And this is possibly where the problem lies. The hollow scores of valuation really reside in the brand and its imagery. In every valuation of a start-up that I do for potential investors, I dig deep on the brand front. And this is where I discount deeply as well. It is good to premiumise on the physical front, and it is certainly most prudent to discount on the brand image front. One is solid, and the other is at best a liquid and at worst a gas. The final frontier of funding to breach for the start-up that is a unicorn is its listing. Out here, every piece of valuation metric is tested by a diverse set of investors, each representing a piece of the market universe. Everything counts here, the physical and the virtual. Possibly more of the physical and less of the virtual.
Listing day is therefore the time when the entire effort of the start-up is tested to the core by the market and given a price. And in that price rests true value, a price that thinks beyond and behind the story. Till the next IPO then, let’s keep thinking.
(harishbijoor@hotmail.com)