What does the Prosus write-down mean for Byju’s valuation

Byju’s has not had a very endearing year so far. Its FY21 losses were the highest ever reported in history and the FY22 results are yet to be announced. In between, many early backers who had committed funds to Byju’s even backed out citing valuation concerns. In the latest salvo, Prosus NV which holds nearly 9.67% stake in Byju's, has sharply downsized the valuation of Byju’s in its books. It has recently written down the value of its holdings in Byju’s to just $578 million as of September 2022. That translates into an overall valuation for Byjus close to $5.9 billion; a far cry from the $22 billion valuation in its latest funding round.

The good thing is that Prosus has not yet exited its investment in Byju’s, which shows that it continues to be positive about its prospects. However, what Prosus has done is to reclassify it as a non-controlling financial investment rather than an associate. That means, Prosus no longer exerts significant influence over the financial and operating policies of Byju’s, which his normally a signal that they may look to exit the company in the near future. That is not surprising considering the pace at which various global private equity funds have been exiting their stake in various digital plays like Paytm, Delhivery and Nykaa.

The fair value of the group’s Byju’s investment at $578 million has been apparently decided through by an independent third-party firm. That is not great news for Byju’s that has seen its valuation stagnate at around $22 billion for a long time. At this juncture, the decision by Prosus to write down the valuation of Byju’s from $22 billion to just $5.90 billion shows the problems that digital companies in India are facing. Revenues are growing but expenses are rising even faster. The net result is that net losses have been widening. Byju’s blamed an accounting change for the sharp losses in FY21, but the market is not buying that narrative.

Byju’s is perhaps following the example of other digital plays like Paytm which have seen substantial erosion in value. For instance, since the time of listing, the market cap of Paytm has fallen from Rs139,000 crore to just around Rs30,000 crore. This Rs1 trillion market cap loss is the highest among any IPO in the last 20 years and that is not too encouraging. Edtech companies like Byju’s have been retrenching staff heavily to match costs with revenues and that has not gone down well with the markets. But, if the action of Prosus is any indication, it does not bode too well for Byju’s, a virtual bellwether among the Edtechs.

For the full fiscal year FY21, Think & Learn Private Limited, the holding company of Byju’s reported a net loss of a whopping Rs4,588 crore. Ironically, the losses are nearly twice the total revenues of Rs2,430 crore for the full fiscal year. Revenues have been static in the midst of a slew of expensive acquisitions by Byju’s. Its core edtech model has also suffered with the reopening of schools as people have once again shown a preference for physical classes over online classes. Clearly, the odds are stacked heavily against Byju’s. As stated earlier, Byju’s pegged the bad performance on changes in accounting practices which resulted in deferring revenues to subsequent years. Markets are far from impressed.

At one point of time, Byju’s had a huge appetite for fund raising and for global acquisitions. It has slowed down on both fronts. Funds are just not available as PE funds are getting increasingly getting sceptical about such models that are not backed by adequate fundamental performance delivery. Byju’s is backed by marquee names like Softbank, Chan Zuckerberg Initiative, General Atlantic, Prosus and Tiger Global. However, the latest write down by Prosus is likely to impel other PE funds also to follow a similar line. Clearly, the problems for Byju’s are far from over. In fact, a new set of problems may have just begun.