PharmEasy to rework IPO valuations as mood sours

With a number of digital IPOs on the anvil, there is likely to be a total rethink on the size of the issue as well as the valuations sought. In the last few months, it is not just the likes of Paytm and CarTrade that have corrected sharply. Even star performers post listing, like Zomato and Nykaa have taken it on their chin. That has a forced a lot of forthcoming IPOs like PharmEasy, OYO, Delhivery etc to take a fresh look at their valuations ahead of IPO.

One of the first in the list is online pharmacy, PharmEasy, which is likely to plan a readjustment of its valuation on the lower side. PharmEasy is a total fresh issue and there is not OFS component to it. Also, PharmEasy (owned by API Holdings) is yet to get approval from SEBI. Currently, if the size of the issue is lowed by 20% in case of fresh issue and by 50% in the case of OFS, then fresh DRHP has to be filed and fresh approval of SEBI sought.

One of the best indications of tapering valuations of these digital players is the falling grey market premium for most of the players and PharmEasy has been leading the way in loss of GMP value. For instance, the GMP of PharmEasy used to be in excess of Rs.130 and is now lower at around Rs.70. PharmEasy may consider a lowering of the issue size, lower prices and also change the timing of the issue. Even OYO Rooms has seen its GMP fall sharply.

In terms of the last fund raising done by PharmEasy, it was valued at an imposing $5.4 billion and hence the company was targeting valuations of $7-8 billion in the IPO. Obviously, things don’t work in such a linear fashion and now PharmEasy would be happy if it can get valuations that match its last valuation of $5.4 billion. Clearly, there is a lot nervousness about digital companies at steep valuations and hence toning it down may be a good option.

The other big digital player that is also planning to cut its issue size and also trim it valuations is OYO Rooms. Originally, OYO had planned to seek valuations of $9-12 billion but it might settle for valuations of around $7 billion. This is lower than the valuation that OYO got in its last fund raising but that is understandable considering the industry it operates in. Hotel and tourism industry has been one of the worst impacted due to being a contact intensive sector and that explains the lower valuations for OYO.

However, PharmEasy still has the advantage of industry dominance. As per a report by Bernstein Research, PharmEasy gets nearly 50% of the online pharmacy GMV (gross merchandise value). This is far superior to 16% market share of GMV for Tata 1MG and 15% for Reliance NetMeds. PharmEasy is expected to maintain its dominant market share even after the arrival of horizontals like Reliance, Tatas and Flipkart. For now, the concern is over the immediate pressure on valuations.

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