The recent move in prices of popular e-commerce stocks listed in India has caught the eye of investors. It begs the question, is the tide turning for E-commerce stocks?
New-age stocks outperform benchmarks in the last 1 month; What happens next?
Some new-age internet stocks have sharply outperformed the benchmark Nifty50, Nifty IT and even NASDAQ in the past one month after a massive underperformance in the last 1 year. Is it time to buy?
In the last 1 month, PB Fintech (Policy Bazaar) has surged the highest among e-commerce stocks, registering a jump of 44 percent followed by One 97 Communications (PayTm), which has risen 21 percent in this period. Meanwhile, FSN E-Commerce (Nykaa) and Zomato have advanced 13 percent and 16 percent, respectively, in the last 1 month.
In comparison, the benchmark Nifty index is down a little over 1 percent, Nasdaq has lost 2 percent whereas the Nifty IT index has added just 3 percent in this period.
However, the last 1 year has not been very kind for these stocks with all these 4 stocks sharply underperforming the benchmarks.
While Nykaa and Zomato have shed 34 percent and 31 percent, respectively in the last 1 year; Paytm is down 21 percent and Policy Bazaar has lost 13 percent in this duration. In comarison, The Nifty is up 5 percent while the Nifty IT index and Nasdaq have declined 9 percent and 17 percent, respectively.
Despite the severe fall in Nifty IT and Nasdaq, the e-commerce stocks still performed worse.
Most of these new-age stocks have also lost over 60 percent of their value from their respective all-time high levels.
Paytm has tanked the most, down nearly 68 percent from its all-time high of ₹1,962, hit in November 2021. Meanwhile, Zomato has also cracked 68 percent from its record high of ₹169, hit on November 2021.
Nykaa has also shed 67 percent from its all-time high of ₹429, again hit in November 2021, whereas Policy Bazaar has lost around 61 percent from its record high of ₹1,470, hit around the same time as others.
Investors who had bought these stocks around their IPO have seen material erosion in their investment value. It is therefore pertinent to examine the fundamentals of stocks as well as the upcoming trends and risks involved before investing in any firm or to assess if one should stay invested or consider exiting their positions.
What should investors do now?
From an investment point of view, it is important to determine if the recent recovery in these e-commerce stocks is on the back of overall positive market sentiment or driven by stock specific approach.
In this case, it can be clearly noted that since the Indian benchmarks have not been performing well in the last 1 month, this recent move is on the back of individual developments.
Like in the case of Paytm, post its December quarter results (Q3FY23), the firm saw multiple upgrades from various brokerages.
Even though Paytm reported a net loss of ₹392 crore for the third quarter of the current financial year, it narrowed sharply from a net loss of ₹778.4 crore for the same period a year ago. Also, the firm also beat its own guidance turning EBITDA-positive in Q3FY23. Its EBITDA before ESOP cost stood at ₹31 crore with the EBITDA (before ESOP) margin at 2 percent of revenues, turning the brokerages positive towards the firm.
Analysts cheered the improvement in lending volumes, operational efficiency, revenue growth and profitability at the ‘adjusted EBITDA level. Macquarie Capital Securities (India) Pvt Ltd has ‘double’ upgraded Paytm's parent One97 Communications Ltd's stock to 'outperform' from 'underperform'. The brokerage has also raised the target price by 78 percent to ₹800.
Also, as per some recent media reports, telecom major Bharti Airtel has proposed to merge its payment bank with the PayTM payment bank in a share swap deal; though the company has apparently denied any such proposal.
It also announced a share buyback program in December. Ant group of China, one of the promoter entities, has decided to sell its stake in the company, offering a major buy opportunity for investors.
Meanwhile, in the case of Zomato, brokerages believe that the company's re-launch of its membership program (Zomato Gold) as well as its acquisition of Blinkit, a grocery-delivery app are positive developments and will further aid its business.
Brokerages have also maintained their bullish calls on Zomato even after its loss widened in Q3. Brokerage Nuvama Wealth Management stated in its report that the company posted better-than-expected Q3FY23 revenues.
Zomato’s consolidated net loss widened to ₹347 crore from ₹63 crore in the year-ago period. However, consolidated revenue from operations surged 75 percent year-on-year (YoY) to ₹1,948 crore.
Similarly, brokerages have also retained bullish calls on Nykaa, and Policy Bazaar in hopes of a strong outlook.
Nykaa’s net profit had also fallen 71 percent YoY to rs 8.5 crore in Q3FY23 from ₹29 crore in Q3FY22, but revenues jumped 33 percent YoY to ₹1,463 crore. Meanwhile, PB Fintech's consolidated loss in Q3 narrowed to ₹87 crore from ₹298 crore in the same quarter of the previous year. Its revenue from operations was up 66 percent year on year at ₹610 crore.
However, before investing in new-age stocks, it is important to note that the regulatory environment for e-commerce businesses is still at a nascent stage and could have material implications for these businesses. Investors need to factor in this risk while deciding to invest in these stocks.
But, if these companies can sustain and deliver strong percent revenue growth for the next few years, and generate enough cash flows, these can also become fundamentally strong and good investment opportunities. But right now, it is too early to say.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, believes that when India’s underperformance changes, new-age digital companies also will start performing. Some results from this segment are very good like Paytm's. Zomato also has done reasonably well, but Nykaa’s results came below expectations, he said.
The long-term growth potential of these companies is huge and, therefore, in spite of the short-term challenges, these stocks have buyers, particularly after the sharp correction from their listing peak prices, he added.
However, S Ranganathan, Head of Research at LKP Securities, believes that pricey valuations coupled with a lack of earnings visibility continue to plague several new-age stocks across segments and investors are not yet enthused with their quarterly earnings trajectory.
Investing in these stocks currently entails a high-risk approach and is not very suitable for risk-averse investors. One must always consult their financial advisor before making investment decisions.
|Stock performance (%)
|From all-time high