A private valuation reset is about to hurt stocks

Financial markets are interconnected and do not operate in silos. Therefore, what happens in public markets has an impact on private transactions and vice versa. The lofty valuations of many of India’s new-era listed companies have already seen a reset, with valuations down 30% to 65% from the highs of major names.

Company 52 weeks high CPM Switch (%)
Zomato 169.1 83.9 -50.38
Payment 1961.05 688.5 -64.89
Nykaa 2574 1824.05 -29.14
PoliticsBazaar 1470 775.8 -47.22

Against this backdrop, Tata Power’s deal with a pre-money equity valuation of Rs 34,000 crore is seen by some analysts as significantly below the expected valuation of around 50%. It’s a big number. More importantly, the trade value could be a warning signal that private market valuations are becoming more sensitive.

Is Tata Renewables undervalued?

While the valuation of Tata Power’s renewable energy business, which includes solar and wind assets, EPC business, electric vehicle charging infrastructure and solar rooftop business, is expected to come in below expectations, the moot question is whether these estimates were unreasonable to begin with.

Although there is no direct peer for Tata Power’s renewable energy platform, if we consider the renewable energy sector as a set of peers, the valuation does not appear to be below par. For example, ReNew Power, which is listed on the Nasdaq, trades at an EBIDTA/VE yield of around 10%. By comparison, Tata Power Renewables based on FY23 forecast EBIDTA is valued at an EBIDTA return on EV of less than 7.5%. So Tata Power may not have gotten a bad deal from the BlackRock-Mubadala consortium for a nearly 10% stake in its new renewable energy platform. Is this value lower than it could have been, say 6 months ago? Most likely, if you take into account that ReNew Power is trading today at a 33% discount from its 52-week high.

What should also be kept in mind is that another round of fundraising will be needed for the renewable energy sector in about 18 months, as the current injection of Rs 4,000 crore will only meet the need for investment only for two years. And a turn down can be a big sentiment damper. In this context, it might be better to price stocks more realistically to begin with so that it is possible to price the next cycle at a fair premium or close to parity.

Valuation resets can hurt

It is generally considered that when liquidity is withdrawn, asset valuations witness a downside reset. It may not be different this time. In his recent GREED & Fear note, Chris Wood of Jefferies opined: “From a GREED & Fear perspective, the obvious area where problems are emerging is where the most money has been made over the past ten years and more. This is the private world of alternative investments. The obvious issue here is that, unlike listed market players, private players do not have to mark their assets on a daily basis.

The sign of trouble will come if fundings begin to come in at lower valuations than in the previous funding round, suggesting losses for existing investors and lenders.

This is what we should expect in a cycle of monetary tightening that ends up triggering a recession. Greed and fear are not economists. But on this point, history shows that almost every round of Fed tightening seen since the 1950s has ended in a recession.

In recent times, several publicly traded companies have made inroads into new-era businesses, mostly through entities created specifically for these companies with the idea of ​​raising private funds to finance their growth. EV arms from Tata Motors and Ashok Leyland are just a few of them. Valuations assigned to many weapons of this type can now be questioned, causing the valuations of their parents to be reset.

The age of rationality

The days of assigning high numbers to sum-of-the-parts assessments may be over. A more rational approach based on discounted cash flows may be more prudent to take today as valuations are redefined by tighter liquidity. So be careful. Stop buying potential value arguments based on the last known transactions. The past is history. The future will probably see the adoption of more conservative estimates. Be ready for the reset.


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