Seeing past the IPO value mirage in 2023

On October 3, 2022, a little over a month before the lock-in period for Nykaa’s pre-IPO investors was to expire, the company made a bold, if baffling, move. It announced a 5:1 bonus share issue.

The rationale was unclear, and still is. Usually, a company issues bonus shares to reward shareholders by distributing accumulated earnings. It also increases the liquidity of the stock, attracting more investors.

None of this applies to Nykaa’s bonus issue. The company lost a third of its market capitalisation—a whopping Rs 20,000 crore—since the issue was announced. The stock has eroded 60% of shareholder value since its listing day. Many of the company’s large investors, such as Lighthouse India Fund, TPG, and others, are also exiting.

Payments platform Paytm is also in a similar situation. It announced a buyback in a bid to support its stock price. The announcement failed to assuage investors’ concerns. On January 12, 2023, Alibaba reportedly sold a 3% stake in the company, pushing the scrip’s value down by 6% at the end of the trading day.

Between November 21 and January 23, while the BSE IPO Index is down 35%, the stocks of Nykaa and Paytm are down 58% and 65%, respectively. Ironically, at the time of Paytm’s IPO, Madhur Deora, the Paytm CFO, commented that the company had set its listing price “rationally and put it on a lower level on the different valuation choices we had on the table.”