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    Fresh IPOs will not happen at same high valuations: Sanjeev Bikhchandani

    Synopsis

    “What happens when the public market corrects? It means that the fresh IPOs will not happen at the same valuation.”

    I will advise Vijay Shekhar Sharma to hang in there; good cos bounce back: Sanjeev BikhchandaniETMarkets.com
    “Private markets tend to follow public markets after a lag of a few months. Both Sequoia and SoftBank said that valuations will correct in private markets going forward. So investors will be more discerning. They will be more selective and some investors will prefer to invest in public markets in the US because those valuations are more reasonable now,” says Sanjeev Bikhchandani, Founder & Executive VC, Info Edge.

    How will a public market investor read into this very sharp reversal in some of the startup/new internet companies?
    Most stocks have corrected and not just the startup stocks, but the midcaps also seem to have corrected more. The start-up stocks seem to have corrected a lot but I would say we have to wait for the dust to settle. Some of the underlying causes of this movement appears to be what the Fed has been saying in terms of stopping the quantitative easing programme in terms of contracting the balance sheet as well as increasing interest rates. All of this will have an impact on markets around the world in addition to the geopolitics that is spooking the US market.

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    In India, there is uncertainty around the Budget. In a week or so, things will be clearer but this is going to be shopping time. So, let me explain to you what happens when the Fed contracts its balance sheet. It is a huge one and when that contracts, basically liquidity contracts. When liquidity contracts, people go out of some of the investments. In addition, if interest rates are going up, then two things happen; one is the cost of leverage to investors goes up. The second is people leverage less and some investors move from equity to debt because interest rates are higher. Also, there are some late stage, pre-IPO growth investors from overseas who have a mandate to invest both in private and in public markets and should the equity prices in the US correct, they will perhaps allocate some more funds there and perhaps fewer funds here.

    Having said that, there are other investors who have a mandate to the private markets and some of them have a mandate only to India. They will stay and so we have to wait and watch a bit.

    The big picture is that there was a regulatory selloff in China which really caused nightmares, de-rated some of the Chinese internet companies. Now we have a valuation led selloff happening in US companies which is having impact on Indian tech companies. What does that mean for the start-up ecosystem?
    Like I said, let us wait till the Fed meeting ends. Let me put it this way. Private markets tend to follow public markets after a lag of a few months. Both Sequoia and SoftBank said that valuations will correct in private markets going forward; they are expecting it. So yes, investors will be more discerning. They will be more selective and some investors will prefer to invest in public markets in the US because those valuations are more reasonable now. They may allocate some capital from here to there.

    Could anybody have ever predicted the kind of downcycle that we are seeing? I am not asking you to speak on behalf of Zomato or Paytm or Policybazaar or Nykaa. But at the time of the IPO pricing, did you guys factor in this kind of a selloff at all?
    As far as the Zomato IPO pricing was concerned, given the feedback that is coming from the market, it was believed that this is a reasonably fair priced. In the open market, the price more than doubled and so obviously the free market was pricing it higher than what Zomato gave the stock at.

    So in that sense, the IPO price was not unfair, not excessive and which is why it got the subscription it did and which is why it went up the way it did. Likewise for Nykaa. In 2006, when we went public, we offered our shares at Rs 320. It hit Rs 580 or Rs 628 on day one. It doubled, then it went down, then it went on to hit Rs 1,400. From there, when the Global Financial Crisis happened within six to nine months, it was down by 75%. But we were still above the IPO price. Now there is no formula I can give that says how much the drawdown will be? This is rather impossible to predict. But in general, my advice has been to be price conservative and make sure that everybody wins.

    Is this the March 2020 moment where one thought if one could lay his hands on any of these new age tech companies they were going to make money?

    The honest answer is I do not know. And anybody who says he knows is a liar because nobody can predict markets in this kind of a situation. So, we will wait and watch and keep running the business.

    Do you think some reluctance, some degree of deep assessment, conservative methodology also will be at play because post the IPOs, we also saw a renewed excitement in the public market. Everyone thought that you value a company in the private market and take it higher in the public market and there is going to be a scarcity premium and these stocks will go even higher. Is the cycle reversing now even in the private market?
    There are two things; one is what I had explained earlier, the US macro, what is the Fed going to do. Given the inflation levels in the US, the Fed is going to contract its balance sheet and they are going to increase the interest rates which means that liquidity will be less than it has been in the recent past which means that some money will go out of markets around the world. Now when there is a price correction, good companies grow into the old valuation, so long as the underlying health is good.

    Now what happens when the public market corrects? It means that the fresh IPOs will not happen at the same valuation. Now if the fresh IPOs are not going to happen at the right valuation, the investors will not come in at that valuation and so it cascades down. So valuations will be a little trickier in the private markets as well but it will take a few months.

    Apart from valuations and what is happening in terms of selloff and in terms of the big picture trend? How do you see trends evolving in 2022 in the start-up space?
    It is well known in public who has filed for a DRHP and who is planning it. Now what this selloff does for those IPO timelines remains to be seen. A few big tech company results are expected in the US this week; Microsoft, Apple results will also tell us the way the market is going to go.

    In spite of the Fed increasing interest rates or planning to increase interest rates starting March and right now suspending quantitative easing perhaps, those results will also tell us what the market will do. Who knows! Let us wait for the results. If they are good, it is one thing, if they are not so good it is another thing. Now having said that, which are the sectors in the private market? They are the same as earlier. B2B SaaS is good, Web3 is an emerging area people are looking at and gaming is good but like I said earlier we invest bottom up, not top down. We do not look at sectors, we look at companies. If it is a good company doing an interesting thing and with good entrepreneurs, we will back them.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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