Zomato's 14% Crash Exposes Faulty Valuations of Indian Tech Firms By Institutional Investors

Shares of food delivery company - Zomato Ltd - fell as much as 14.26 per cent to hit record low of Rs 46 on the BSE as investors dumped its shares after one-year lock in period for its founders, employees, promoters etc ended. The company got listed on July 23 last year and made a strong debut on exchanges. Zomato stock opened for trading at Rs 116, a premium of 53 per cent compared to the issue price of Rs 76.

Zomato shares were in huge demand during the three-day share sale via IPO which ended on July 16. The IPO was subscribed 38.25 times.

Zomato surged as much as 122 per cent from IPO price of Rs 76 to hit an all-time high of Rs 169 in November last year.

Shares of new age tech companies like Zomato, Paytm and Nykaa are facing selling pressure on the back of expensive valuations they were commanding. Now with rich valuations and tight liquidity conditions these shares are facing additional selling pressure, analysts said.

Paytm is down 65 per cent at Rs 743 from IPO price of Rs 2,150 and FSN E-Commerce Ventures, which operates fashion retailer, Nykaa is trading above the IPO price of Rs 1,125 but it is down 29 per cent at Rs 1,435 from its opening price of Rs 2,018 it touched on its stock market debut.

"The selling pressure in Zomato stock has intensified  with the lock in period for insiders and institutions coming to an end. Despite the sharp correction, it's a matter of speculation to even attempt a guess at its true value at present.  That's because not only the business is far from making profits in core segment of food delivery, but is diversifying into fintech and quick delivery segments where viability is a big question mark. If the precedents in other countries are anything to go by, these bets may push company further away from profitability.  We believe investors would be better off focusing on companies with clear visibility on profitability and with prudent capital allocation,” Richa Agarwal, senior research analyst at Equitymaster told Outlook Business.

Declining Institutional Ownership

Institutional ownership in Zomato has been coming down consistently. At the end of June quarter, institutional ownership, which include large shareholders like mutual funds, alternate investment funds, foreign portfolio investors, financial institutions/ banks and insurance companies, came down to 12.6 per cent from 13.49 per cent at the end of March quarter. Institutional ownership at the end of December quarter was 15.68 per cent and 15 per cent at the end of September quarter, data from BSE showed.

Likewise, institutional stake in Paytm has dropped from 11.2 per cent at end of November 2021, when IPO was launched, to 6.6 per cent at the end of June quarter.

However, in Nykaa, the institutional stake has gone up from 7.88 per cent at the end of November 2021 to 9.49 per cent at the end of June quarter.

Recently, Zomato's Board of Directors approved a proposal to acquire the cash-strapped quick commerce company Blinkit for Rs 4,447 crore.

Blinkit was earlier known as Grofers. Zomato believes the acquisition will help increase its hyperlocal delivery fleet utilization and reduce the cost of delivery.