PharmEasy listing pull-out a sign of start-up fatigue: Market experts

Shares of new-age companies have dropped more than 60% amid liquidity squeeze.

India’s largest online pharmacy PharmEasy’s decision to cancel its listing plans reinforces the problems start-ups face when it comes to tapping the public markets.

Bolstered by successful listings of Zomato, Nykaa, and Policy Bazaar, PharmEasy parent firm API Holdings filed for a Rs 6,250-crore initial public offering (IPO) with markets regulator Securities and Exchange Board of India in November 2021.

Since then, the market has turned on its head with shares of new-age companies dropping more than 60 per cent from their highs amid tightening liquidity conditions. This queered the pitch for new-age companies, such as Oravel Stays (Oyo Hotels and Homes), Snapdeal, and Yatra, looking to raise capital from the public.

PharmEasy has now said it will instead raise money from existing shareholders through a rights offering.

Investment banking say more start-ups and their private equity (PE) investors are looking for alternative avenues of raising capital as secondary market valuations have turned viable.

“The market is looking for more profitable stories and not just high-growth ones. The valuation expectations are very high as far as start-up IPOs are concerned. The market situation changed completely. Start-ups will have a tough time raising money. This puts them in a difficult spot. If they take a significant cut in the last round of funding, their existing investors will be upset. If they stick to their valuations, public investors may not be as forthcoming as they were last year. Things are still shaky on the macro side, with interest rates rising. For larger-sized issues to get launched, we need a stable market,” says Pranjal Srivastava, partner-investment banking, Centrum Capital.

Last year was a record year for IPO fund-raise, with companies mopping up Rs 1.2 trillion. Volatile market conditions have hit the primary market this year, with only one company managing to conclude its IPO in three months. This, notwithstanding the market seeing a sharp rebound from June lows.

“Markets have gone up, but people are still cautious. If sentiment was buoyant, we would have seen many IPOs lining up, including those by loss-making companies. The overall environment for IPOs is still tough. We are not close to the buoyancy we saw in 2021 because of uncertainties. A lot of headwinds are present. The IPO process in India is protracted. By the time you want to launch something and start working, it takes three months,” says Dharmesh Mehta, managing director and chief executive officer, DAM Capital Advisors.

It isn’t just the valuations of start-ups firms that have fallen off the cliff. They have faced backlash from public shareholders on issues such as liberal employee stock ownership grants and remuneration of their top executives.

Experts say new-age companies — many still uncertain when they will turn profitable — are wondering if public markets are indeed the right fit.

“If they have to trim valuations, many will choose to go to the private market. The public market was giving a better valuation. That’s the reason they got listed. If that is reversed, they may exercise the option to go back to private markets, which gives them the option to raise money quicker,” adds Mehta.

The downturn in the IPO market has hit PE investors hard. Most have a limited investment lifecycle. Listing gives them the option of on-tap liquidity as it allows them to divest their stake easily. By comparison, secondary deals in the private market require more negotiations and are difficult to come by.

During the first half of calendar year 2022, listing mop-up by companies involving stake sales by PEs slumped 70 per cent to $423 million, compared with $1.4 billion during the same period last year, according to IVCA-EY data.

Distant Dream
 

New-age/tech companies who have filed their DRHPs with Sebi

Oravel Stays (Oyo)

Droom Technology

Snapdeal

EbixCash

Navi Technologies

Yatra.com

Source: Sebi website