The year 2021 came with a bullish trend and but the IPO craze that persisted also bought a series of overvaluations with it. As it turns out most of the promises made by such overvalued stocks were broken within a year! Many major IPOs from last year’s buzz, fizzled out and have already gone below their listing price including Paytm and Zomato. So, what exactly went wrong?
In this article, we will cover the reason for the decline of these shares and whether it is a good time for Mobikwik and Ola to come in with the IPO.
The Story Behind The Overvaluations
Post the spoils of Covid 19, investors’ optimism in the market remained high with the virtue of being a part of the V-shaped recovery. This gave rise to the bullish trend. Soon the optimism led to “over-optimism” leaving the valuations irrelevant. As a majority of retail investors and private equity funds were pouring money into the market, share prices were zooming.
Many new-age companies observing this scenario found the perfect time to enter the stock market with an IPO. Companies like Zomato, Policy bazaar, CarTrade, Paytm, etc. all ushered in and investors were ready with their shopping carts.
Valuations And A Sneak Peek Into The Profits Of These New-Age Companies
The value of the company is determined by the profit it can generate which is determined by the Price to earnings ratio of the company. Based on these ratios, the valuation of the company can be determined. Since we are talking about the new-age tech companies came with high growth prospects and they expect to receive higher valuations.
But most of the companies were in losses like Zomato, Paytm, Policy Bazaar, and many more…
Investors base their claims on future growth, new-age tech, a monopoly in the sector, and foregoing the key financial metrics.
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From the above, we can compare the exorbitant valuations eventually resulting in disappointment among investors. We take a look at the reason for the fall below
- Due to the quantitative restrictions impacting the flow of the liquidity in the market and impact these new-age technology businesses.
- Exit of the major player like FII and private equity funds.
- Fall in the global indices amplifying these comparatively small companies.
What Does It Mean For OLA and Mobikwik?
The current scenario doesn’t look very favorable for Ola and Mobikwik for extraordinary IPOs. As both are in the new-age tech business, the above parameters apply to them as well. With the disappointing performance of IPOs, questions are raised about the valuation of the companies dealing in this segment.
As per the CAPE ratio used for calculation valuation, Indian equities were 33.2 times overvalued. This is leading most of the FII and PE funds to exit or to reduce the holdings in the Indian stock markets.
The last year was completely dominated by the bulls. This resulted in even loss-making companies getting high valuations. Now times have changed with bearish trends and pessimism entering the markets.
Adding to this the global indices are falling with the Ukraine -Russia conflict intensifying this fall even more.
Economies around the world are engaging in implementing quantitative restrictions for combating inflation. This is leading to rising bond yields and a safe haven for FIIs than the Indian market. Fall in money supply discourages investments. And this is very unfavorable for any company raising money from the market for the first time.
Ola is considering an IPO soon while Mobkwik is still undecided. Considering these scenarios above, Ola and Mobikwik should avoid IPOs at least until the markets stabilize from external shocks.