Home / Markets / Mark To Market /  Behind the shrinking investor appetite for Zomato

One year is a long time in the stock market. A hot investment can totally fizzle out during the period. Zomato Ltd is an excellent example of that. The company was listed on the stock exchanges on 23 July 2021 after its initial public offering (IPO) was subscribed by more than 38 times.

The hype around the stock was mindboggling. One fund manager equated it to being an Infosys moment, where he talked about the potential of the stock generating unprecedented wealth for its shareholders just like Infosys did in the past. Though it is worth mentioning here that, unlike Zomato, the Infosys IPO was not fully subscribed to and had to be picked up by the underwriters.

The trouble is that now things are looking very different. Zomato’s stock closed yesterday at 43.95, down nearly 75% from its all-time high of 169 seen on 16 November.

So, what happened? At a simple level, the world was excited about investing in stocks in 2021. In the following year, it isn’t. At least, not that much. This has led to foreign investors selling out of Indian stocks.

While domestic investors have been buying, they haven’t been buying enough to ensure that the stock prices don’t fall. Of course, different stocks have fallen at different rates, and Zomato has fallen much more than the others have.

When times are good, investors do not ask the most basic question of where the future earnings will come from. But when times change, as they have now, they get around to asking this question. Something similar has happened to Zomato—a loss-making company still trying to figure out its business model. In its current business model, as its revenue goes up, so do its losses.

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In fact, Zomato is not the only such company which listed on the stock market last year. There are several other such companies, including One 97 Communications Ltd (Paytm) and PB Fintech Ltd.

The massive fall in the price of such stocks raises multiple points. First, during the IPOs, investment banks and stock brokerages came together to drive up the buzz around these companies. While this is part and parcel of the IPO game, the trouble here was that the companies did not make any money.

Second, promoters were allowed to offload a part of their stake to retail investors. Should caveat emptor be allowed to operate in this case?

The promoters offloading a portion of their stake wasn’t really totally true about Zomato, where the company did raise money for future expansion, but in other cases, the offer for sale was a larger part of the money raised through the IPO.

Third, analysts working at stock brokerages worked overtime to justify the price of such stocks. In one case, earnings were forecast up until 2041 to justify the IPO price. Of course, the trouble is anything can be justified on an excel sheet, but should this lead to retail investors burning their fingers as reality strikes, as it has been in the recent past?

Fourth, it raises a much broader question. At the heart of the current financial system are largely financial services groups. These groups run investment banks managing IPOs, stock brokerages which help investors buy shares in an IPO, mutual funds and insurance companies which help investors buy shares in an IPO indirectly and, finally, banks and non-banking finance companies, which are ready to lend money to investors looking to borrow and invest in IPOs. The point is that the system is so structured that it makes sense for the insiders to drum up the price of an IPO. Of course, the outsiders (read the retail investors), who come to the stock market party late, end up paying the price for it, as they seem to have in this case as well.

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