Zomato's Success Signposts Arrival Of Patient Capital, Faith In Domestic Listings

The stupendous success of the Rs 9,375 crore initial public offering (IPO) of food delivery company Zomato is a seminal moment in Indian stock market history. Not only did the issue sail through with over-subscriptions amounting to 38 times the total issue size, the share also listed at a huge premium of 53 per cent to the issued price.

However, this is not just about the success of one capital issuer. It is a celebration of two inflection points in the development of the Indian capital markets.

One is the arrival of patient domestic capital — something that was only possible with foreign money so far. The other is the growing acceptability of domestic listings by start-up investors who have largely been foreign so far. They know that they no longer need to list their shares in Singapore or London to have easy exit options. The Indian stock market has arrived on the global scene.

Zomato’s success is unique for this may be the first time a company with over Rs 4,000 crore of accumulated losses having such a big listing debut. It implies that many more such tech-fuelled IPOs will receive a generous response from Indian investors, whether institutional, high net worth or even retail ones.

In the Zomato issue, qualified institutional buyers bid 51 times as much as the shares reserved for them; non-institutional shareholders bid for 32 times their reserved quantities; and (here’s the big thing) retail investors bid for seven times the shares reserved for them.

The only people who bid less than what they were allotted were employees, who took up barely 62 per cent of their entitlements. Clearly, one out of every three shares meant for them went abegging. Employees often are unable to see what investors see — potential rather than problems and challenges.

Zomato’s success will now spark a likely boom in tech-fuelled IPOs. Among those already in the queue are wallet company MobiKwik (Rs 1,900 crore) and Paytm, a payments bank that has become a retail powerhouse in the fintech space (Rs 16,660 crore).

However, it would be difficult to presume that Zomato’s success can be easily replicated. There were several unique factors that worked in its favour.

First, as a consumer facing company that reached middle class homes that ordered large amounts of cooked food during the Covid pandemic, Zomato had huge name recognition on its side.

This means companies like Paytm can also hope to ride the IPO wave due to sheer brand salience, and possibly MobiKwik too — but to a more limited extent.

Paytm as a brand is far more ubiquitous than even Zomato, having penetrated well below the middle classes to street hawkers, kirana stores and very small businesses. It should have no problem selling the idea despite its huge accumulated losses. Small quantities can probably be bought on its own app.

Second, the market for super-large IPOs was seeded first by Jio, with parent Reliance Industries raising a massive Rs 53,000-crore-plus through a rights issue last year. The market’s appetite grew after years of IPO drought.

Third, the retail market for mutual funds — through systematic investment plans (SIPs) — has been raising around Rs 90,000-Rs 100,000 crore annually for the last three years, and 2021-22 will probably do even better, having raised Rs 26,571 crore in the first three months so far, according to AMFI data. This means both mutual funds and retail investors are developing an appetite for long-term equity investments.

Fourth, given poor fixed deposit rates and falling yields in government-backed investment avenues (post office savings schemes and government of India bonds), investors now realise that higher returns mean growing a degree of comfort with higher risk instruments like equity. This is being helped by liberal IPO financing for smaller investors.

Zomato’s success was not all its own. The climate for it was just right.

For the government, the lesson is simple: it should disinvest tech-based retail companies like IRCTC as soon as possible. The company’s market cap is around Rs 36,000 crore today and it is a profitable railway ticketing company. Zomato’s market cap is closer to Rs 1 lakh crore.

The question the Finance Minister should ask herself — and her boss — is this: if a loss-maker like Zomato can be valued at Rs 100,000 crore, how come a government-owned profitable monopoly gets a valuation of just Rs 36,000 crore?

Even if the government divests its stake to just 26 per cent (as long as the monopoly remains), IRCTC’s shares will have as much value for the government as it now has with 67 per cent.

It must privatise management and ownership now. Remaining an arm of government is the kiss of death for most public sector undertakings. IRCTC is hardly the kind of strategic play for the government that, say, a State Bank of India is.