Analysts cautious on new-age stocks on expensive valuations

Stocks of new-age companies have seen a mixed performance thus far in calendar year 2023 (CY23).

While those of One97 Communications (parent company of Paytm), PB Fintech and Zomato have surged up to 63 per cent year-to-date (YTD), FSN e-commerce, the parent company of Nykaa, however, has dropped 14 per cent YTD.

By comparison, Nifty50 and Nifty 500 indices have advanced 7 per cent and 8.7 per cent, respectively, during the period, ACE Equity data show.

This mixed performance of new-age companies at the bourses, analysts believe, has been in the hope of an improvement in the financial performance in the quarters ahead.

That apart, the overall market momentum, especially in the mid-and small-caps during CY23, also contributed.

Zomato, for instance, has been the only new-age company which has achieved profitability in the April-June quarter (Q1) of the current financial year (FY24).

Though PB Fintech, Paytm, and Nykaa have reported improved Ebitda during Q1-FY24, Siddhesh Mehta, research analyst at SAMCO Securities, said it is too early to say that they are out of the woods.

A prudent long-term investment approach, he believes, requires sustained profitability trends.

For the recently concluded quarter (Q1-FY24), food delivery platform Zomato reported a consolidated net profit of Rs 2 crore as against a consolidated net loss of Rs 186 crore in the corresponding quarter of the previous year (Q1-FY23).

Its revenue from operations stood at Rs 2,416 crore, clocking a growth of about 71 per cent year-on-year (YoY); Ebitda at Rs 12 crore (vs Ebitda loss of Rs 152 crore YoY); and Ebitda margin of 0.4 per cent.

Paytm, meanwhile, narrowed its net loss to Rs 357 crore relative to loss of Rs 644 crore YoY.

It reported a positive Ebitda (before ESOP) of Rs 84 crore for the quarter.

PB Fintech, the parent company of Policybazaar, too, reported a positive Ebitda for the first time, at Rs 23 crore for Q1-FY24. Its net loss narrowed to Rs 12 crore.

That said, Nykaa, the online beauty retailer owned by FSN e-commerce, was the only company that reported a 26 per cent YoY decline in net profit attributable to shareholders at Rs 3.3 crore as against Rs 4.5 crore last year.

On a consolidated level, though, net profit grew 8 per cent to Rs 5.4 crore.

The stock earned ratings downgrades from Kotak Institutional Equities, ICICI Securities, and Nomura post the results.

Investment strategy

The run-up in these select counters has made analysts cautious in the near-term, who suggest investors do not paint the entire sector with the same brush and exit them, but look for revenue visibility coupled with valuation comfort before investing.

From a near-term perspective, however, they see all positives (earnings growth potential of the next two-three years) being already factored into the prices. Besides, their stretched valuations make them prone to steeper correction in case the market sentiment turns sour.

“All the new-age companies have ‘Sell’ rating from us at current valuations.

“These should be bought selectively only on major declines based on higher earnings growth potential,” said G Chokkalingam, founder and head of research at Equinomics Research.

Shares of PB Fintech are valued at 83x price-to-earnings (P/E) based on FY25 earnings estimate; Paytm at 252x P/E for FY25; Zomato at 133x P/E for FY25; and Nykaa 138x P/E for FY25.

“These stocks have rallied amidst a bull run in the overall market, thereby making them vulnerable to selling pressure at peaks. Investors should exercise caution and avoid adding these stocks to their portfolios until the financial outlook of these companies exhibits a robust upturn,” advised Siddhesh Mehta, research analyst at SAMCO Securities.

Quarterly reports/disclosures, market conditions, sector-specific news, business viability, competitive advantage of these businesses and the ability to expand and innovate are some of the factors Sonam Srivastava, founder and fund manager at Wright Research suggests investors study before taking an investment call in the stocks of new-age companies.

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