Surge in new-age digital IPOs remind of the IT boom: Raamdeo Agarwal

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Raamdeo Agarwal, chairman, Motilatl Oswal AMC, is known for spotting opportunities and obstacles amid a storm. Amid the current Covid-19 crisis, speaking at the Motilal Oswal Global Partner Summit, he said that the pandemic has led to the second coming of the Indian information echnology (IT) sector.

Clearly, the IT sector has emerged as a beneficiary of the Covid-19 pandemic and this is being seen in the robust Q1 earnings of the companies so far. On the longevity of growth prospects, Agarwal said, that even though the service providers believe that growth benefits will continue for two years, but my sense is it will intensify as the opening up happens as the orders they are getting will not be executed immediately.

Journey to $100 billion 

Digital companies have proliferated in the last 4-5 years and have now taken center stage. Many have scaled up at the expense of massive cash burn and are now coming to the public markets

“We are all witnessing the technology prowess here with Zomato IPO hitting the street and several others are lining up too for IPOs. This could be a very interesting space to watch. Such companies have made huge money in the US and China and they are the largest companies in the world today. For us, these companies will start at around $1 billion but I see a possibility of growth to $100-200 billion”, said Agarwal

At the same time one needs to be cautious, he said. While this is emerging as the most imaginative sector, in Y2K, many companies just began calling themselves dot-com companies just to get valuations, so even now many companies will emerge and start calling themselves fintech companies, so one needs to be careful.

Tech IPOs and IT boom

He said that whenever a new segment emerges, suddenly we see an influx of many companies. During the IT boom, we saw a number of companies coming. Satyam for example was loss-making in 1995 and then in five years, these companies just scaled up at the rate of 80-100% compounded and all of them started making a lot of money in 2000 and that’s when we saw the Y2K boom, where stocks went up by almost 100 times.

This time, my sense is that the digital side of the technology sector is going to be the starting of such a boom.

“This is not happening only in India, it has already happened in the US and in China and some of these companies will become very powerful commercial enterprises, which ones only time will tell”, he added.

Not worried about losses on books of Zomato, Paytm

“It is fantastic that there is no profit. You only have to imagine the profit. If there is no earning it is very good, as you can look at a price on hope or a price on imagination instead of the price on earnings”, he said.

He pointed at how in the US, we have seen the evolution of such digital companies like Amazon, which had a very thin profit or no profit, so their P&L was negative but cash flow was positive.

Will new-age digital companies become multi-baggers? 

In every bull run, one sector takes the centre of gravity and really creates wealth. The emerging digital sector fulfills all the criteria to be one, however, there are very companies that can successfully do blitzscaling.

Blitzscaling is what you do when you need to grow really, really quickly

“You can scale 1:100 but you can also lose hundreds of billion dollars and that is not successful blitzscaling. For digital companies, it is possible because marginal cost is literally zero. Only the companies which can not only scale up the topline, but also scale up EBITDA margin will be preferred and make money for investors”, said Agarwal

He also said that we already have about 25 unicorns in the country and about 150 unicorns can emerge in the next five years, so the exciting times have just begun.