Why do continuous loss-makers command a high future earning ratio?
Some stocks are worth buying based on their strong financial fundamentals, future business potential and empirical evidence of their business sustenance. Advisors recommend such stocks with an expectation of a stake sale premium when one private equity or strategic investor sells its holding to another buyer at a premium. That is no less than speculative pricing, an inseparable part of the equity market. While the former is a safe bet, the latter is not always. Stocks of companies with private equity investments usually command a high price-earning (PE) ratio for no justifiable reasons. Such stocks move up based on newspaper reports of stake sales, which the “suitor” denies subsequently. They hit the limelight because of the private equity fancy around them.
Why do some stocks like Restaurant Brands Asia (RBAL), formerly known as Burger King India Ltd, rule a PE ratio of around 74 per cent as of the third weekend of July despite heavy loss per share that the company reported in the year 2022-23 is for this reason. Portfolio advisors still recommend it! Now Everstone Capital’s Singapore-based investment vehicle, QSR Asia Pte Ltd holds around 40 percent of RBAL, which it acquired at various prices ranging from Rs 10 initially to Rs 90 a share after conversion of the convertible preference shares in February 2020, roughly a month before India declared total lockdown.
In May 2023, there was a report of QSR Asia discussing with some investors to sell its stake a day after RBAL reported a loss of Rs 241.80 crore for the financial year 2022-23. The report named Domino’s Pizza’s parent, Jubilant Foodworks as the “suitor”. Jubilant denied it, calling such a report completely baseless. Such a report is a ploy to drive up prices so that PE investors can exit at a good price. Its price started going up in March following the rumours of General Atlantic buying the stake from QSR Asia Pte.
India’s retail investors usually do not make much from new-generation companies where there are PE investments. These companies come with a big bang soon to defuse the heat. By the time all PEs exit at the first chance through a high-priced IPO and the rest through post-listing deals. Retail investors get caught in the traffic jam.
RABL’s entry into the Indian market was too late. Its IPO was at the wrong time amidst the second wave of Covid-19. It is still not out of the woods. High food prices, simmering competition, slowing employment market, the rising cost of living etc dwarf the company’s future profitability. The next hope is not on its fundamentals but on the vanity of foreign funds holding the stake and, of course, the American name. Such stocks are not safe for retail investors but risky. Their luck may save them, but not any investment parameters.
