History has the uncanny knack of repeating itself. Is it doing it with a vengeance this time around? A little trip down memory lane will be in order before dwelling on the present.
In the 90s, the south, more so Tamil Nadu, had seen mushrooming of finance firms of unincorporated variety. And, they had lured unsuspecting people into depositing their hard-earned money into these firms by offering unimaginable rates of interest and enticing freebies.
Eswari, Ramesh Car, Anubhav and the like thrived on. When the bubble burst, poor common investors just lost their shirts.
Many are still ruing the loss of their money, and regretting in leisure their investment into these firms. Taken off guard, the Reserve Bank of India (RBI) reacted strongly and imposed stringent restrictions on finance firms as whole sans any real distinction.
Even non-banking finance companies (NBFCs) of better kind are still struggling because of the shenanigans of a few. Much water has flown under the bridge since then.
Are we witnessing a repeat of the past, albeit in a different format? For the uninitiated, the IPO (initial public offering) of Zomato, an online food delivery aggregator, helped the company raise close to Rs 10,000 crore. It’s a big feat considering that the company has been consistently making losses. Not just that.
Have you considered the losses?
It has even declared that it will continue to make losses even in the future. Read against this backdrop, should one hail the resounding success of the public issue of Zomato? Or, should we sit up and ponder?
The Zomato show may encourage others such as Paytm, too, to knock at the capital market. At one level, Zomato success is seen as a vote of confidence. No doubt, the return of trust in the capital market must be hailed. At another level, however, a sense of worry strikes.
If a loss-making company can strike rich in the capital market, what does it indicate? One shudders to think of the consequence should something happen to the carefully created bubble as we trudge along.
Angel investors or venture capitalists provide risk capital for entrepreneurs who have the propensity to make a foray into hitherto unexplored space. Obviously, such enterprises can’t be funded by bank finance.
To that extent, angel investors and venture capitalists are a boon for many an innovator-entrepreneur. It is only fair that such investors are provided the exit option within a specified time-frame.
Have you thought about the volume game?
So, the IPO as a tool to help their exit is perfectly understandable. Up to this point, things are fair. What if the IPO-making company is consistently in red? That is when questions arise.
More often than not these enterprises show enormous appetite for growth, and don’t hesitate to pump huge money in the process. They play the volume game, and indulge in assorted practices to entice investors of the PE kind.
Paytm, OYO, Dream11, Zomato, OLA, Swiggy and the like are big brands, and their success is perceived by their ability to drive up volume. Ironically, all of them are still soaked in red!
While playing the volume game, they continuously burn cash to somehow show growth consistently. For them, the end (volume growth) is important. Hence, they skip scrutinising the means.
When a loss-making entity floats a highly successful IPO, questions are automatically raised. The angel investors and PEs must be mega pleased with the roaring success of Zomato IPO.
Have you thought about perception management?
If stock markets are perception-driven, companies such as Zomato have perfected the perception management art. Mutual funds and the like too would have picked up Zomato shares.
There is nothing amiss about these. They are within the realms of rule. Profit is not a precondition to float an IPO at the moment.8
Each Zomato share of face value of Rs 1 was sold at Rs 76. It got listed around Rs. 116 and is now above Rs 140. In the perception game, profitably running manufacturing outfits are left far behind! There is no correlation between the issue price of a share and its intrinsic worth in the modern-day listing process.
In Chennai, Subiksha group, a retail store, went bust when the owners chased volume in the valuation game. ICICI Ventures, which invested in the group, managed to palm off a part of its investment to Azim Premji entity at a hefty price just before Subiksha collapsed soon after the global stock market crash in mid-2000.
Is Zomato a happy story? Or, is it a cause for worry? Either way, it is time to indulge in a hard look at the emerging dynamics in the marketplace.
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