The IPO of Netweb Technologies is off to a good start with the stock listing at an 88 per cent premium at ₹942.50 as compared to IPO price of ₹500. This is not surprising, given the buoyant market sentiment. In fact, in our IPO review note, published in bl.portfolio edition dated July 16, we had asked long-term investors to give the IPO a pass even as we noted that listing gains were likely. However, with the stock now trading at around 112 times FY23 PE, valuations have reached irrational levels and are unlikely to sustain. Investors must be cautions, given that many stocks in recent years that had bumper listings — such as Nykaa, Zomato, and PB Fintech — are trading significantly below their listing price today. Hence, those who were allotted shares can book profits and exit the stock.
Factors to watch
There were five factors underlying our concerns over the IPO. The first was the low technology moat that the company had. To the extent that the company’s red herring prospectus pushed a case for bright prospects for the industry the company was engaged in, it was contradicted by the company’s lack of technological patents. In the absence of patents one cannot determine the company’s technological moat and to what extent it can compete with more resource-equipped technology players in the long run. There are also risks that if key employees move, without patents the company may lose the technology.
The other factors that we thought investors must assess before buying the stock were the low margins of the company (gross margin at just 27 per cent), implying lower value addition by the company as compared to many other tech companies; lack of any domestic or international peers, making it difficult to compare its business and prospects; the need to assess corporate governance and management practices for a while post listing, as prior to IPO the company was 97.8 per cent owned by promoters; and, finally, the pricey valuation.
The IPO was priced at 60 times FY23 PE, which itself was expensive for a company of its size, margins and customer concentration (47 per cent of revenues from top five customers in FY23). Now, post listing, at over 110 times PE, the risks are significantly to the downside.