Is the worst over for new-age tech companies? Here's what analysts say

A renewed buying interest in new-age technology companies was seen in the past one month, as investors pinned hopes on improved outlook post the October-December 2022 quarter results (Q3FY23).

Shares of Paytm, FSN e-Commerce Ventures (the parent firm of Nykaa), PB Fintech (parent firm of Policybazaar), and CarTrade Tech surged up to 17 per cent in a month, as against 0.2 per cent rise in the S&P BSE Sensex during this period.

However, analysts sound cautious over sustenance of this strength after companies reported a mixed bag of numbers in Q3FY23. This, they believe, can puncture the rally in the short-term as investors await earnings catch-up.

In the recently concluded quarter (Q3FY23), Zomato’s consolidated net loss widened to Rs 347 crore from Rs 63 crore, in the year-ago period. However, consolidated revenue from operations surged 75 per cent year-on-year (YoY) to Rs 1,948 crore. Similarly, Nykaa’s net profit plunged 71 per cent YoY to Rs 8.5 crore in Q3FY23 from Rs 29 crore in Q3FY22, but revenues jumped 33 per cent YoY to Rs 1,463 crore.

“Though volumes are relatively better, it is difficult to say whether buying interest or strength would sustain in new-age tech stocks. Since the market-tone is bearish, investors can expect higher volatility and stocks near 52-week lows tend to get punished first. While new-age stocks like Paytm, PB Fintech, and Cartrade Tech have seen some recovery from bottom in recent days, Zomato and Nykaa have remained dormant,” said an analyst tracking these companies at Religare Broking.

AK Prabhakar, head of research, IDBI Capital, too, remained pessimistic over investing in new-age tech companies as they continue to burn cash flows, without generating any profitability. For S Ranganathan, head of research at LKP Securities valuations of some of these stocks are a concern. “A lack of earnings visibility continues to plague new-age tech stocks across segments,” he believes.

That said, Paytm, and PB Fintech comforted investors as their net losses narrowed in Q3FY23. While Paytm’s consolidated net loss narrowed to Rs 392 crore in Q3FY23, PB Fintech stood at Rs 87.6 crore.

In this backdrop, analysts at JM Financial remain bullish on PB Fintech and Paytm, albeit from a long-term horizon.

“Since PB Fintech has an unparalleled position in insurance, the upheaval in credit business could generate significant investor value. Furthermore, the management has re-iterated guidance towards group Ebitda breakeven in Q4FY23, and a long-term vision of Rs 1,000 crore of profit-after-tax (PAT) by FY27,” they wrote in a post-result analysis, upgrading target price to Rs 950 per share (from Rs 910).

Paytm on the other hand, they believe, is likely to turn profitable by FY26 and they forecast up to 42 per cent compounded annual growth (CAGR) in revenue over FY22-25, with contribution margins sustaining at 50 per cent.

“While we have remained cautious on Paytm’s business model since our initiation given the high cash burn, the company’s operating metrics are gradually improving, with management’s focus on increasing efficiencies and profitability,” the brokerage firm added.

That apart, analysts assert that since new-age tech stocks do not perform well in a bearish market, the situation would turn around as investors’ risk-appetite improves.

“As domestic markets underperform global peers (like China, Hong Kong, and South Korea) delivering 2.3 per cent negative returns on a year-to-date basis, new-age tech companies will start performing once the situation improves,” said Dr. V K Vijayakumar, chief investment strategist at Geojit Financial Services.