The Indian stock markets are at hysterical (sorry historic) high. With the Covid-19-led-economy, the bewilderment that’s making the reading of the tea-leaves critical, if those market valuations are actually sustainable!
Indian capital markets have a flurry of IPOs coming up. It will be good business for investment bankers. It already is good billing for many search firms, who specialise in placing CFOs with prior IPO experience, to those unlisted firms gearing up to board the public-markets gravy train. Even the media-sales would benefit from the pre-IPO advertising blitzkrieg that would be unleashed.
Many of the tech firms in this IPO journey have not yet made profits and probably their business plans could be euphoric, considering the Covid-19-forced tech-adoption business numbers for FY 20-21. It is to be seen if these business trends will continue for long or will they go south once consumer behaviour goes back to the old normal. Many of these tech firms have taken pains to reduce their losses from their record-highs. The cost structures will be in debate too.
The size of the Indian public markets is estimated at $3.0 trillion, with sizable retail investor participation and growing awareness about the listed companies. Of late, the market is also seeing investor activism, demanding better disclosures and corporate behaviour from these companies.
The CFO
The CFO of the listed entity is the firm’s face and voice to the investor world. The pressures of quarterly investor calls / meetings and to have detailed disclosures will be her/his responsibility. Public markets will demand granular data / information disclosures.
Most of these tech firms have dealt only with a limited set of private market investors, with almost the theme of “Passing the parcel” or “musical chair” scenario of ever-increasing-valuation and stage changing hands from one set of private investors to another. The Public listing of these stocks would have the latest (high) valuation passed onto the stock market during the listing ! It is not possible to expect that markets would hold the pricing at its high always. The test of the CFO is when the pricing starts plateauing or going downward.
But what would happen, in a hypothetical situation of the valuation bubble increasing after listing, and suddenly in a downturn the non-retail investors exit, leaving retail investors holding the bucket? After all, it can be easily misplaced to confuse the popularity of one’s favourite ECom brand, with that of well-run and governed listed stock to invest into.
If the firm has pending debt servicing to the debt-markets, the CFO will further have to worry, if the share price goes lower below a threshold; that every same threshold could be a trigger for some covenants by the lenders But what would happen, in a hypothetical situation of the valuation bubble increasing after listing, and suddenly in a downturn the non-retail investors exit, leaving retail investors holding the bucket? After all, it can be easily misplaced to confuse the popularity of one’s favourite ECom brand, with that of well-run and governed listed stock to invest into.
If the firm has pending debt servicing to the debt-markets, the CFO will further have to worry, if the share price goes lower below a threshold; that every same threshold could be a trigger for some covenants by the lendersBut what would happen, in a hypothetical situation of the valuation bubble increasing after listing, and suddenly in a downturn the non-retail investors exit, leaving retail investors holding the bucket? After all, it can be easily misplaced to confuse the popularity of one’s favourite ECom brand, with that of well-run and governed listed stock to invest into.
If the firm has pending debt servicing to the debt-markets, the CFO will further have to worry, if the share price goes lower below a threshold; that every same threshold could be a trigger for some covenants by the lenders—be it to bring additional collateral or to bring margin monies. Any delay or violation in those covenants could create market panic in that public-stock!- be it to bring additional collateral or to bring margin monies. Any delay or violation in those covenants could create market panic in that public-stock!be it to bring additional collateral or to bring margin monies. Any delay or violation in those covenants could create market panic in that public-stock!
Public markets demand high governance and consistent business (growth) performance or cycles. Public markets do not like highly volatile business performance. Market analysts hate surprises. Public companies are therefore punished more severely for surprises than they are for weak, but anticipated, results ! If the analysts are predicting say a 30% YoY revenue growth, but your team is unlikely to deliver more than 20%, warn the market early.
Any undue pressure on the entity's teams to deliver outlandish results could lead to breakage of processes or ethical standards. Here is where the true test of governance occurs.
Any statement made by the KMPs in the public arena could be construed as a forward statement, and hence these individuals need to be aware of these outcomes. The culture of the firm is tested in these pressure times. (The worst I have heard about a large upcoming IPO tech entity’s culture is a comparison that “culture at a Microbiology lab, despite all biohazards, is better than that firm’s!”).
Leaders in new public firms should gear up for their proactive engagement with the new stakeholders, completely different expectations of their behaviour, and various reporting and compliance needs. For the CFO, an IPO is not a one-off event, but rather the start of their life in a public company and their relationship with all the investors, brokers and analysts who support the capital markets. A business is arguably at its most vulnerable immediately following an IPO. For it’s rules of engagement are very different suddenly, and in public glare. It is actually right after the IPO, that the actual job begins.
The stability of the CFO’s career track record will be watched closely like never before. For it would be an indicator for the investors to watch out for ! It is indeed a tough ask to be a CFO for a multi-bagger public entity that benefits from a bull-market’s valuation-driven IPO.
CFOs, of course remain accountable for a wider range of financial responsibilities, such as safeguarding assets, risk management, financial reporting, financial planning and analysis, cash flow management, fund raising, investor relationship. Over the past decade or so, the CFO’s remit has widened and the time-to-react has shrunk considerably. Now, the CFOs require a much greater understanding of other areas of the business too and they need to be sufficiently skilled in collaborating across the organisation as well as financial engineering.
More importantly, the capital markets in India were used to largely seeing the promoters as the main face of the company. With the new age tech firms entering the stock markets, the Investors will learn that one can be the promoter-founder-CEO, but might be declassified as promoters due to regulations. Hence the onus of addressing the markets will be expected from the experienced and mature CFO.
Hello CFO : Good luck for all the calm demeanour, despite all the pressures. If you are good and last many cycles of such tumultuous calm and chaos, you are a finder’s keeper.
Views are personal. The author is corporate adviser & independent markets commentator.