Matthew Gonzalez
Determining whether a newly listed company is fairly priced remains one of the more challenging exercises for investors participating in India’s primary market, particularly when the business in question has yet to achieve consistent profitability. This challenge sits at the centre of ongoing discussions around the Snapdeal IPO, where market commentators have offered varied perspectives on whether the offer price adequately reflects the company’s growth prospects and competitive positioning. As is often the case with any closely watched Upcoming IPO from the consumer internet space, opinions among analysts and seasoned investors have differed considerably, making it worthwhile to examine the various angles being debated before forming an independent view.
Jump To
- The Challenge of Valuing Loss-Making Businesses
- Comparing Against Listed and Private Peers
- Growth Trajectory as a Valuation Anchor
- The Role of Post-Listing Performance in Validating Valuation
- Forming an Independent Investment View
The Challenge of Valuing Loss-Making Businesses
Traditional valuation approaches like price-to-earnings ratios tend to lose relevance with unprofitable companies. Analysts therefore turn to price-to-sales ratios, gross merchandise value multiples or user-engagement-based comparisons to establish a fair sense of a company’s valuation. Not that any of these methods are without flaws either, as they all possess the potential to mask crucial differences in companies’ quality, cost structures and paths to profitability.
For the current offering, the discussion has revolved around the extent to which the market should reward the management for switching to a more focused value fashion positioning, as opposed to the broad-based approach which failed to overcome the headwinds of competition from larger, better-capitalised players. Proponents of the offer point towards the narrowing losses and a clearer strategic direction, whilst doubters continue to cite the lack of profitability and the intensely competitive environment as justification for demanding a lower valuation multiple.
Comparing Against Listed and Private Peers
A common approach taken by analysts while reviewing a fresh offering involves comparing the target against both listed and private industry peers operating in a similar space. In the context of a value fashion e-commerce company, this exercise could entail looking at other online fashion retailers, value-oriented retail chains, as well as more generic digital marketplaces serving a similar customer base. However, a combination of an unusual mix of businesses contained within this particular offering (marketplace, software-enablement and consumer branding) leaves analysts searching for appropriate benchmarks with which to compare it. The analysts therefore have to make certain assumptions while attempting to attach a fair value to the business based on these disparate elements.
This lack of consensus is sufficient enough to generate widely-varying conclusions pertaining to whether this offering is attractively priced or not. Investors consuming the debate through financial media should therefore not be surprised at the seemingly contradictory viewpoints, as they are merely the result of the natural uncertainties involved in arriving at a valuation.
Growth Trajectory as a Valuation Anchor
Apart from the earnings picture, the investment thesis for offerings of this type also revolves around the projected growth trajectory. The rate at which the company is able to grow its order book, expand its reach in terms of pin codes covered and improve its customer acquisition costs will colour the assessment of its potential to turn profitable. Investors focussed on the growth story should therefore remain mindful of the fact that forecasting is an inexact science and variations from the projected path are bound to occur – particularly in an intensely competitive market space like India’s e-commerce sector.
The Role of Post-Listing Performance in Validating Valuation
It is often only with the benefit of hindsight that the accuracy of a forecast can be established, particularly with regard to the growth rate. This is why post-listing volatility tends to be quite common for offerings which are still some years away from achieving profitability, as investors re-evaluate the prospects based on a more realistic assessment of the company’s future potential. A few quarters of strong results can therefore drive up the valuation multiple significantly, with the opposite also being true for situations involving underperformance.
Forming an Independent Investment View
With regard to the offering under consideration, it is evident that investors would do well to form an independent viewpoint based on the information contained in the prospectus, rather than attempting to rely on a single report issued by an external analyst. Taking the time to consider varying viewpoints on the offering while remaining focussed on the realities of the growth environment will enable investors to make a more informed investment decision. As is the case with most offerings in the growth equity space, patience will be a virtue for prospective investors in this offering as well.
At a Glance
- Determining fair pricing for newly listed companies in India’s primary market is challenging, especially for those that have not achieved consistent profitability.
- Traditional valuation methods like price-to-earnings ratios are less relevant for unprofitable companies, leading analysts to use price-to-sales ratios and other metrics.
- The Snapdeal IPO debate highlights divergent opinions about the company’s growth prospects, with supporters citing narrowing losses and skeptics pointing to its lack of profitability.
- Analysts comparing the Snapdeal offering to listed and private industry peers face difficulties due to the unusual mix of businesses involved, leading to varied conclusions on pricing.
- Growth trajectory and customer acquisition costs are crucial factors in assessing the potential for future profitability in the competitive Indian e-commerce market.
- Investors are advised to form independent views based on the prospectus and consider different perspectives while being patient regarding their investment decisions.
