Lock-in for 78% Zomato shares to expire next week, analysts see big sell-off risk

Zomato CEO Deepinder Goyal

With the lock-in period of one year for around 613 crore shares or 78 percent of Zomato’s stock ending next week, analysts cautioned that the company’s share price may face sell-off pressure.

“As there is no promoter, all shareholders, including the founders, collectively owning 77.87 percent who were locked-in would be free to sell the shares without any disclosures on July 23. This would be a big overhang on the stock price,” said Shriram Subramanian, founder and MD of proxy advisory firm InGovern.

"Even when the anchor investor lock-in period ended one month after listing, the stock fell 8 percent on a single day,” he recalled.

Zomato shares were trading at Rs 53.7 apiece at the time of publishing this story on Tuesday.

The food delivery company made a bumper entry on the bourses on July 23 last year. While its shares were issued at Rs 76 in the initial public offering, they listed at Rs 115 on the BSE with a premium of over 51 percent. Subsequently, Zomato breached the Rs 1-trillion market capitalisation mark and the shares scaled a lifetime high of Rs 169 on the BSE.

“It is important for retail investors to look at the price at which the PE/VC investors came in. If their price of acquiring Zomato shares were substantially lower than the current levels, they will look to book profits in a bearish market,” said G Chokkalingam, founder of Equinomics Research and Advisory.

“As the cost of acquisition is also very low for many (investors), it offers excellent profits to early stakeholders. So, in my view, the potential downside risk is very high after July 23,” he said.

One of the earliest investors on Zomato’s cap table is Info Edge. Although the Sanjeev Bikhchandani-led company registered a gain of Rs 357 crore from the public issue last year, it still holds a 15.18 percent stake in the food delivery company that amounts to more than Rs 6,330 crore.

According to Zomato’s IPO prospectus, the average share price at which Info Edge bought the Zomato shares was Rs 1.16. However, the company has not revealed the average price of acquisition for other large shareholders in its filings.

Zomato’s cap table includes pre-IPO and early investors like Alipay (7.1 percent), Ant Financial (6.99 percent), Tiger Global (5.11 percent), Sequoia Capital (5.10 percent) and Temasek (3.11 percent).

According to experts, investors should watch what shareholders such as Uber and Delivery Hero do after the lock-in expires. Given that these  companies are themselves under pressure due to an imminent global slowdown, they might look to cash out their holdings in Zomato.

While ride hailing major Uber owns a 7.78 percent stake in Zomato, foodtech company Delivery Hero boasts a 1.36 percent shareholding.

“There might not be a huge sell-off because the stock has already corrected and valuations are dismal. However, the PE/VC investors who got in at a much lower valuation may look to book some profits,” said Karan Taurani, an analyst who tracks internet and consumer sectors at Elara Capital.

“But a negative bias cannot be ruled out due to a lot of business concerns, specifically on whether foodtech unit economics improve hereon despite achieving a certain scale.”

Zomato’s average order value (AOV) has remained flat over the last one year, rising marginally by Re 1 from Rs 397 in FY21 to Rs 398 in FY22. Its food delivery growth has flatlined in the last few quarters as the gross order value on the platform rose only 28 percent between the July quarter last year and March quarter this year.

The company’s investment in quick commerce has also attracted a lot of questions. Zomato had last month announced that it would acquire Blinkit (formerly Grofers) in an all-stock deal at $570 million. It also intends to fund Blinkit’s losses to the tune of around $250 million till the end of 2023.

“I think the cash burn also for the company as a whole will be higher, because quick commerce is a business segment which is highly fragmented,” Taurani said.

After a firm opening, shares of the online food delivery platform slipped into the red on June 27 after the company's board approved the acquisition of Blinkit. However, brokerages like CLSA, BofA, Credit Suisse and UBS have given a 'buy' rating to the stock with target prices varying from Rs 82 to Rs 95 apiece.

“The fact that the shares crossed the Rs 160 levels will also play at the back of the minds of employees who received stock options and early investors. However, if they sense a downward pressure from the Rs 50 levels now, they may want to book gains and exit,” said Ambareesh Baliga, an equity analyst who advises family offices.