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Volatility in internet stocks was expected, path to profitability is key: Taurani of Elara Securities


Karan Taurani, SVP-Research Analyst at Elara Securities (Image: Karan Taurani/LinkedIn)

Karan Taurani, SVP-Research Analyst at Elara Securities (Image: Karan Taurani/LinkedIn)

Trading and volatility in internet company stocks are in the expected lines, feels Karan Taurani, SVP-Research Analyst at Elara Securities. Speaking to CNBC-TV18 on the lock-in period expiring of new-age companies like Nykaa and Zomato, Taurani was firm that “path to profitability” was the key.

Broad assessment

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“What’s happening now was more on expected lines, clearly you will see a shift in nature of investors in these internet companies. Now some in the bucket will stand out and the reason for that is the path to profitability. I think you have to show a path to profitability otherwise the valuations may not be justified,” he said.

He noted that when the IPOs launched most new-age companies were given valuation-based off sales because there was no metric to measure the EBITDA or PAT margin. “So, wherever there is visibility that there could be profits, the companies are getting a premium valuation. This is how it’s going to be. And profits focus is something which will continue,” he said.

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Taurani said Elara is benchmarking internet companies to traditional companies like Zomato to Jubilant FoodWorks, and Nykaa to traditional FMCG personal care companies.

“In terms of growth rates, internet companies are in the wide range of 24-40 percent, depending on the category they are playing at, while traditional companies in the same bucket are not going more than 10-12 percent in terms of revenue. So that premium is justified, b we are also looking at the margin as well,” he said.

“What we’re trying to do is look at which company is able to garner a better EBIDTA margin with hefty growth, and the premiums are going to be higher v/s traditional counterparts. This is the only way to mirror it as of now,” he added.

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Advice on these stocks

Taurani was more optimistic about Nykaa, compared to Zomato, stating that the beauty products retailer has “got a more proven business model as far as profits are concerned”, while the food delivery company is “more of an uncertain situation in terms of profitability”.

“We have a ‘buy’ rating on Nykaa, our target price is Rs 240,” he said. “We believe the competitive intensity is growing and it’s not very easy to replicate what Nykaa has done in terms of first mover advantage, customer experience and trust-worthiness. Lower fulfilment cost, higher ad revenue, and increased share of private labels give good leeway and room here for revenue growth to be around 25-30 percent for the next three years with consistent improvement in margin.”

He mentioned: “The only moderate risk factor for Nykaa would be the fashion business, we are not very confident of good profits there.”

Also Read | MC Explains: Nykaa’s controversial bonus issue decoded in five questions

On Zomato, Taurani sees that growth has come down severely from 35-40 percent range to 25-30 percent range. “But that’s not bad if the company is trying to focus on margins there is a clear trajectory that will move up from hereon.”

From business perspective, the concerns are multi-fold. There has been constant pressure from day trades. There is also the issue of order value in India. “If you look at increase in terms of delivery frequency, it is very hard for order values to move up, and effectively delivery charges may also not move up because they are linked to the order values.”

But if they are able to surprise positively, the stock would also see some re-rating, he said.

In terms of losses, the BlinkIt business is highly fragmented with economics still not proven on a larger scale per se and we clearly don’t know the intention or how far Zomato is going to go in that business.

New-age stocks in red

Shares of Paytm hit record low on November 22 morning, slipping as much as 10 percent in early trade. One97 Communications, parent company of Paytm has seen stock price decline over 13 percent in the week gone by. SoftBank divested 4.5 percent stake in the company for Rs 1,631 crore through an open market transaction. Earlier this month, the lock-in period ended for the pre-offer investors that had invested in Paytm, which was listed on the bourses in November last year. During the lock-in period, promoters and investors cannot liquidate the pre-IPO securities held by them.

Ever since Nykaa’s bonus shares have hit Demat accounts, pre-IPO investors have been offloading their stake in the company. Today, on November 22, 1.84 crore shares or 0.65 percent of equity changed hands in a block deal. The stock opened lower and was down two percent at Rs 179.70 on the National Stock Exchange at 9:20 am.

In the week gone by, Nykaa stock price declined over 7 percent after Citigroup has launched a block deal to sell shares worth $125 million or Rs 1,000 crore in cosmetics-to-fashion retailer. The news came days after the lock-in expiry for pre-IPO investors in retailer expired on November 10.

Watch the full interview here


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