Why did some fund managers skip the Zomato IPO?

These fund managers say they didn’t want to invest in a loss-making company

July 16, 2021 / 11:51 AM IST

While several mutual fund (MF) houses bought shares of Zomato, by applying to its anchor book, some decided to skip the issue.

Moneycontrol reached out to some of the fund houses that avoided Zomato’s IPO, but they refused to comment on record.

Losses turn away fund managers 

These fund managers say they didn’t want to invest in a loss-making company, which right now gives little comfort on when it can turn profitable.

They are also not fully convinced with the business model. “Zomato’s business right now is that of an enabler. In such businesses, initially, the focus is on just growing the transactions on the platform by giving discounts and offering lower delivery charges. The cost of acquiring users itself can lead to significant cash burn,” says the chief investment officer of a fund house, requesting anonymity.

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Broking analysts say it might take another couple of years for the company to turn profitable. “We expect Zomato to turn profitable on an EBITDA and FCF level in FY23. Given the nature of the business, depreciation and finance costs are also smaller, resulting in profitability as early as FY23,” notes an Edelweiss Securities research report.

While these fund managers say they’d prefer to wait and watch before thinking of investing in Zomato, the broking house’s report expects earnings to grow at a compounded annual rate of 65 percent between FY22-23 and FY 29-30.

To be sure, several broking houses have been positive on the IPO and given a ‘buy’ call to their clients.

ALSO READ: Why did hybrid, GenNext and Digital India theme funds invest in Zomato's IPO?

Business model shaky

Fund managers that are sitting out this IPO say that Zomato’s current business model can be easily replicated. “If a larger tech giant such as Amazon also gets into this business, Zomato could find it difficult to hold onto its market share,” says another fund manager, requesting anonymity.

In fact, last year, Amazon launched a food delivery business – Amazon Food – in select parts of Bangalore.

"Our objective as a fund house is not to invest in companies that are at very early stages of their business or are loss-making. When evaluating investments in start-ups such as Zomato, investors must realise that the mortality rate of starts-up is very high. Almost 95 percent of start-ups fail. That is the reason why private equity and venture capital investors spread their investments across several start-ups. Retail investors should avoid making large investments in Zomato," says the chief investment officer of a fund hosue, requesting anonymity.

Market dynamics can also make an impact

Fund managers say that the rush for the IPO might just be due to the sharp rally the stock market has seen. However, they caution that if and when the markets correct, the focus could shift to fundamentals, from sentiments. “That is when the lack of profitability in Zomato could come under heavy scrutiny of investors,” the second fund manager says.

Other fund managers also point out that the IPO is a fresh sale, which means several old investors are still holding the company’s shares. “Over the next few months or years, these existing investors might also start selling their stock, which may put pressure on the share price,” the chief investment officer says.

“Mutual funds should be looking for long-term investments for their investors. This is a high-risk investment at the current stage. Investors should wait for the company to turn profitable,” says Vinayak Savanur, founder and chief investment officer, Sukhanidhi Investment Advisors, which advises clients on mutual funds and stocks.
Jash Kriplani is a journalist with over ten years of experience. Based in Mumbai. Covering mutual funds, personal finance. His last stint was with Business Standard, where he covered mutual funds and other developments in the financial markets
first published: Jul 16, 2021 09:29 am

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