Shares of FSN E-Commerce Ventures, which owns beauty retailer Nykaa, slumped more than 8 per cent on Wednesday after the one-year lock-up period on pre-initial public offering (IPO) investors ended.
Its stock ended at Rs 1,040 – down 8 per cent over its previous day’s close. Its shares were trading 3 per cent down during most part of the day, but slumped just minutes before close of trade, probably on the back of a large sell order.
The pattern mirrored the trend seen in the shares of Zomato — the first major start-up to list on domestic bourses — and could be a harbinger of what to expect in other start-ups.
In July, shares of the restaurant aggregator and food delivery start-up had tanked more than 10 per cent on the day its one-year lock-up had ended. Within weeks, pre-IPO investors such as Uber, Tiger Global, and Moore Strategic Ventures divested their holdings in Zomato.
The lock-up period for PB Fintech (PolicyBazaar) ends on November 11, One97 Communications (Paytm) on November 11, and Delhivery on November 20.
In the run-up to the end of the lock-up period — where freeze on shares worth over Rs 1 trillion will be eased — stock prices of these four companies have already seen huge drawdowns.
“Most of the stocks will continue to remain under pressure for the next few weeks as a lot of pre-IPO investors who entered these names at much lower levels will look to part some stake once the lock-up opens,” said Abhilash Pagaria, head, alternative and quantitative research, Nuvama Wealth Management, adding, “At current levels, we are recommending investors buy Nykaa in a staggered manner as we see value in these names.”
Shares of Nykaa are down 60 per cent from its record high of Rs 2,574 and down 8 per cent over its IPO price of Rs 1,125.
Shares of PolicyBazaar, Paytm, and Delhivery are down between 45 per cent and 70 per cent from their highs.
In a bid to stave off some selling pressure, Nykaa has announced a five-for-one bonus issue. The ex-date for bonus shares is Thursday, following which the stock will trade at fifth of its current price as investors holding one share will get five shares.
Bonus issuance is largely a book entry and doesn’t alert the fundamentals of a company. However, a lower denomination tends to attract a lot of retail investors as they perceive the stock to have turned cheap.
“The bonus issue can help reduce the selling pressure from pre-IPO investors, providing incentive to hold on to the position to gain bonus shares. However, the main area of concern for consumer technology-based companies is their high valuation and subdued cash flow from operations, which will continue to impact performance,” said Vinod Nair, head-research, Geojit Financial Services.
Unlike most traditional companies, the shareholding of new-age start-ups is diversified with the presence of a lot of private equity investors with specified holding periods. Furthermore, while shares of most start-ups have come off from their record highs, most pre-IPO investors in these companies are still sitting on gains.
In a note, analyst Brian Freitas of Periscope Analytics, who publishes on Smartkarma, highlights that almost all pre-IPO investors in Delhivery have bought their shares at less than Rs 200 apiece, so they are still sitting on nearly double their investment at the least. Shares of Delhivery last closed at Rs 393.