Nilesh Shah of Envision Capital remains positive on new-age digital platforms, citing high growth and improving profit margins. However, he cautions that the rising supply of shares from new IPOs and pre-IPO investor sales could continue to create near-term market pressure.
Nilesh Shah, founder of Envision Capital, continues to hold a positive outlook on the Indian new-age and digital platform sector. He points to the strong growth trajectory of these companies, with many reporting annual growth figures between 20% and 40%. According to Shah, these businesses are increasingly benefiting from operating leverage, where rising scale leads to better profit margins, a shift that is crucial as these companies move from their initial cash-burning phases toward sustained profitability.
Growth and Market Leadership
Shah’s investment strategy focuses on identifying market leaders in sectors that remain underpenetrated, such as digital payments, quick commerce, and beauty retail. He notes that while some of these new-age companies may appear expensive based on current price-to-earnings multiples, a three-to-five-year perspective may present a different view if they maintain high double-digit growth. His firm’s portfolio includes several well-known players in this space, such as Zomato, FSN E-Commerce Ventures (Nykaa), Groww, Angel One, Lenskart, CarTrade Tech, and Paytm (One 97 Communications).
Regarding specific companies, Shah highlighted the strong earnings performance of Zomato. He views the path to profitability for its quick-commerce unit, Blinkit, as a sustainable trend rather than a one-time event, even amidst intense competition in the e-commerce sector. For Paytm, Shah suggested that market concerns surrounding the Merchant Discount Rate (MDR) might be overstated. He sees the primary value in Paytm's established merchant network and its ability to cross-sell financial and credit products to its existing user base.
Navigating Valuation and IPO Supply
Despite his optimism, Shah cautioned about the risks currently facing the broader market. A significant concern for him is the increasing supply of shares hitting the market through initial public offerings (IPOs), Qualified Institutional Placements (QIPs), and the exit of pre-IPO investors. This additional supply can create temporary liquidity pressure, which Shah anticipates may persist for another year. While systematic investment plan (SIP) flows have helped absorb some of this supply, the sheer volume remains a factor for investors to monitor.
Shah emphasizes a disciplined approach to newly listed companies. He considers many recent IPO candidates to be high-quality businesses but notes that they are not always attractively priced upon listing. His strategy involves observing these stocks, conducting deep research, and waiting for better entry points, which might occur during market corrections or following weaker-than-expected quarterly results. For long-term investors, the focus remains on underlying business performance, the strength of the balance sheet, and corporate governance. Investors may track future earnings reports to see if these digital platforms can continue to scale efficiently while managing the regulatory and competitive pressures inherent in their respective sectors.