Behind the decreasing appetite of investors for Zomato

The hype surrounding the stock was mind-blowing. One fund manager saw this as an Infosys moment, where he talked about the stock’s potential to generate unprecedented wealth for its shareholders like Infosys had done in the past. However it is worth mentioning here that, unlike Zomato, Infosys IPO was not fully subscribed and had to be raised by the underwriters.

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

So what? On a simple level, the world was excited about investing in stocks in 2021. Next year, not so. At least not that much. Due to this, foreign investors have sold Indian shares.

While domestic investors are buying, they are not buying enough to ensure that stock prices do not fall. Of course, different stocks have fallen at different rates, and Zomato has fallen a lot more than others.

When times are good, investors don’t ask the most basic question of where future earnings will come from. But when times change, as it is now, they are ready to ask this question. Something similar happened with loss-making company Zomato which is still trying to figure out its business model. In its current business model, as its revenue grows, so do its disadvantages.

Actually, Zomato is not the only company that got listed in the stock market last year. There are several other such companies, including One97 Communications Limited (Paytm) and PB Fintech Limited.

The steep fall in the price of such shares raises several points. Firstly, during the IPO, investment banks and stock brokerages came together to discuss about these companies. While this is part and parcel of the IPO game, the trouble here was that the companies didn’t make any money.

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

Promoters selling off a portion of their stake was actually not entirely true of Zomato, where the company raised funds for future expansion, but in other cases, offers for sale were funds raised through IPOs. was a big part of it.

Third, analysts working in stock brokerages work overtime to justify the price of such shares. In one case, earnings were projected to last until 2041 to justify the IPO price. The problem, of course, is that anything on an Excel sheet can be justified, but should that lead retail investors to burn their fingers as reality strikes, as has been the case in recent times?

Fourth, it raises very broad questions. At the heart of the current financial system are large-scale financial services groups. These groups run investment banks that manage IPOs, stock brokerages that help investors buy shares in IPOs, mutual funds and insurance companies that help investors buy shares in IPOs indirectly and, finally, banks. and non-banking finance companies, which are ready to lend. Money to investors willing to borrow and invest in IPOs. The point is that the system is so structured that it makes sense for insiders to lower the IPO price. Of course, outsiders (read retail investors), who come late to the stock market party, end up paying the price, as it seems to them in this case too.

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