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The Tightrope Walk Of India’s Internet Business, In Charts

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The basic investment premise of the Internet business is to use technology and network effects to achieve high growth and profitability over the long term. Investors strongly agreed with this assumption last year when listing rules were relaxed to make stocks available to Indian internet companies. Less than a year after the initial listing, these Internet stocks are in no demand as the market slumps. And that premise is under scrutiny.

In the stock market, which has moved in the 20% range over the past year, Internet companies listed during this period have helped significantly lower their value. All five prominent internet businesses, Zomato, Paytm, Nykaa, PolicyBazaar and CarTrade, are down 35% to 68% from their listing day highs. And apart from Nykaa, the other four are also trading below the issue price.

Future prospects raise the fundamental question: how are those companies moving on that premise of growth and profitability? In the long run, it will determine their ability to regain and rebuild shareholder value. Expectations for the rising Internet business are doubling revenue within a few years. If revenue doubles in two years, we expect quarterly growth of about 9%. If it doubles in three years, it will grow at 6%.

Since its listing, these internet companies have declared two-quarters to three-quarters of their performance. Growth conditions are uneven, with one-quarter of high growth alternating with medium growth. This also applies to CarTrade, Paytm and Zomato. Each of these faces limits to the growth of their core businesses.

Beyond the core

The pain of growth like this forces these companies to look beyond their core businesses. Paytm is looking at the existence of larger financial services. We are expanding personal loans and preparing for non-life insurance. Zomato has invested $ 225 million in Blinkit (formerly Grofers), Shiprocket and Magicpin in 2021 to invest heavily in rapid commerce. Such an investment will delay profitability. It is not yet known if these new business lines will rival the core business in terms of performance.

In this transition, capital is one resource that will never run out. Most of such companies had abundant private capital. Public issues have been added to their reserves and will help them stay in extended mode.

For example, in the last three years, Paytm has averaged net cash from negative businesses. 1,775 Chlore. This must be covered by capital. At current usage levels, Paytm has a capital of about 6 years and Zomato has a capital of about 11 years.

The foot is wrong

At some point, these new investments will have to be repaid. Ultimately, these internet businesses also need to move to profitability. Currently, with the exception of Nykaa, nothing else is profitable at a net level. They are also running out of capital reserves, rather than building them, as strong, mature and profitable companies tend to do. It makes it difficult to evaluate them. In addition, in the risk and return matrix, the internet business is a risky and high return proposal.

In this current cycle, private investors have found themselves on the receiving side of these nuances. With stock prices plummeting, Paytm, Zomato and EaseMyTrip are seeing an increase in consolidated holdings by individual investors. Given the movement of stock prices, this means that private investors are buying at a higher level and seeing a decline in value. In Nykaa and Policy Bazaar, holdings are declining, albeit slightly. CarTrade also declined, but it was also the internet business with the highest ownership.

IPO fix

Part of the appeal of the public internet business was the opportunity to invest in future businesses. Investors were the first to know these businesses as users. However, usage and investment cases are different. The difference is now widespread worldwide, alerting individual investors.

One example is the US Exchange Traded Fund (ETF) called the Renaissance IPO ETF. It provides “most important US listed companies” with investment trust-like exposure. It has been added to the Exchange Traded Fund in the last three years. Portfolio internet business such as Pinterest, Zoom, Slack, DoorDash, Robinhood, Lyft, Bumble, Asana. Twelve months after the pandemic occurred, this ETF increased 2.5-fold. Over the last 6 months, high volume transactions have decreased by 55%. This shows that the next investor is catching the wrong end of the investment cycle. Internet business is still a double-edged sword.

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