The adjusted EBITDA fallacy for new-age startup IPOs

In 2002, a telecom company backed by private equity fund Warburg Pincus went public on the Indian stock exchanges. There were many unique aspects to this IPO, but one of the most unique was that a loss-making company sought to justify its valuation based on an esoteric valuation metric called Enterprise Value/Earnings Before Interest Taxes Depreciation and Amortisation (EBITDA).

Today, this metric is part of regular investment parlance, but it took a lot of effort on the part of the listing’s bankers to educate and convince the Indian analyst community about not only the metric itself but the long-term prospects of this company.

By 2002-03, this company reported a loss of Rs 176 crore. The next year, it turned a corner and clocked a profit after tax (PAT) of Rs 584 crore. Its stock price went up 5X from the low that it hit post going public and about 3X higher than its listing price.

Today, that same company generates a PAT of Rs 8,300 crore—close to its market cap at the time of listing.