Low hanging fruits? Expert take on deep correction in likes of Zomato, Paytm

The BSE IPO index, which constitutes all stocks that debuted recently, is in a bear grip now, down nearly 20 percent from its highs. Interestingly, the index was the darling of investors just three months ago given superlative returns it delivered. The reason behind the sharp drop is the same as the reason behind its rapid rise: volatile price movement in new age tech stocks.

Shares of One 97 Communication (

), PB Fintech (Policybazaar), , , Paras Defence and Tech are down up to 55 per cent from their all time highs. Many have seen heavy selling in the last five sessions, complemented by similar selling in tech companies in the US.

So, does such deep correction make a case to buy them? Analysts are skeptical!

“Most of these were quoting at fabulously rich valuations,” said Deven Choksey, Managing Director of KRChoksey Shares and Securities. “Till the time you see the entire business model leaning towards profits, it will be little early to buy them in the portfolio. The current valuation of these stocks are a reflection of the froth we saw due to the excess money floating in the capital market.”

He said people should wait before the business model matures and these companies start delivering consistent revenue. Choksey compared them to the model of Jio, which also started its journey from scratch in 2015 and went on to become the largest telecom services provider company in India.

“It was also a startup. It also spent a huge amount of money in creating infrastructure. Now that they have started generating revenue they are into profits. This is the classic example of a success story of a startup. Those startups who don’t follow this story, it will be risky to buy them in the portfolio,” he said on a phone call.

Jio Platforms on Friday said its December quarter profits were at Rs 3,795 crore. In contrast, barring Nykaa, none of the recently listed tech startups have ever delivered a profit. Zomato, Paytm and Policybazaar have categorically said they are not looking at being profitable at this point in time.

When the market was rallying, most acted as if profitability was a moot point, but now that consolidation has begun, this has become a bone of contention. The same people who invested then are rushing to exit.

On Monday, Zomato plunged for the fifth straight day, slipping down to Rs 100 level for the first time since debut. Paytm is down for the 14th instance in the last 15 sessions. During the day it also hit the most bearish target placed on the counter, falling below Rs 900.

PB Fintech, which runs Policybazaar portal, is in no better state. The stock is down for the fifth straight session and trades significantly below its IPO prices. Nykaa, which usually bucks the trend, is also down about 11 per cent. CarTrade never had the chance to rise, sinking investor money from the start on Dalal Street.

Deepak Jasani, Head of Retail Research at HDFC Securities says, in order to decide whether these stocks should be bought, we need to ascertain two things: Why the selling is happening and are these businesses seeing any turnaround?

“Buy one or two names out of those who have a better chance of delivering profits if you want,” he said, adding it is better to buy in small quantities and add more if the situation changes.

Santosh Meena, Head of Research, Swastika Investmart also highlighted that many new age companies came out with unrealistic valuations amid euphoria in the market but we know that only a few companies will survive in the long run.

“I believe Zomato has the potential to perform in the long run. The recent price correction is leading to stock at a reasonable valuation where aggressive investors can use this correction as a buying opportunity for the long-term,” he added.