Zomato IPO: A Market Perspective
What does the IPO mean for the Indian Equity Markets?
By now, unless you have been living under a rock for the past 2 weeks, you have heard of the Zomato IPO. Because it seems like that’s all Indian market pundits (whether self-styled like us or the more serious talking heads on TV) have been on about for these last few days.
Everybody had a Zomato hot take and there are articles aplenty on the pros and cons of investing in, what is at the end of the day, a loss making enterprise. We debated whether to contribute to this information-overload by writing our own analysis but eventually decided not to add to the noise. Instead, we’re going to do a broader take on what this IPO means for the Indian stock markets. Is this a watershed moment for internet companies in India? Have we finally arrived on the global stage? Let’s take a look. But first, some context.
Zomato shares made a strong stock market debut on July 23, closing at INR 126 on the National Stock Exchange (NSE) on Day 1. Zomato’s stock was up 65% from its IPO price of INR 76. On opening, Zomato shares almost immediately hit the 20% upper circuit at INR 138, nearly doubling IPO investors’ money. Zomato currently has a market capitalisation of INR 98,000 cr+ (~$13 bn) propelling it into India’s 50 largest companies and making it just a tad bit bigger than traditional ones like Adani-Total Gas and Tata Motors.
So what does this imply for India? Here are our inferences.
- The India Story is Real — Rising GDP per capita, growing disposable income, one the youngest populations in the world with rising aspirations make for a heady cocktail. India at the end of the day is a 1.3 bn person opportunity. And here lies the chance for generating “alpha.” The story isn’t just about the company or the sector. It is a joint bet on India itself. The potential, in our opinion, far outweighs the downside in the long term. Investors seem to be coming to terms with this fact and fast.
- Digitalisation Trends are the Big Bet — With increasing mobile usage and deepening internet penetration on the backs of cheaper data (thank you, Jio!) India is going digital at a rapid pace. The internet seems to be slowly touching every aspect of India’s economy right from insurance (Policybazaar) and logistics (Delhivery) to pharmaceuticals (Pharmeasy) and consumer (Nykaa). There is now a secular trend in India’s digitisation journey and this was accelerated due to the pandemic. Investors appear to be betting on this “digital/tech” to drive value creation in the future. Such a thing has already been witnessed in USA and China. India’s internet infrastructure however remains nascent when compared to these markets. As more consumers get used to consuming online, we should see more explosive growth going forward.
- Post Covid-19 Rebound Party is Here — Indian markets had a bumper rally in FY21 after the crash last year as a result of the national lockdown. In FY21, the benchmark Sensex and the BSE500 gained 68% and 77% respectively. While a second wave of infections may have put a temporary dampener on the rally, the increasing pace of vaccinations clubbed with receding fears of a “third wave” seems to have bolstered confidence as far as the markets are concerned.
4. Market Depth Shows Increasing Global Confidence — Institutional investors appear to have significant appetite to buy into tech-driven and disruptive models in India. The market has shown sufficient depth to absorb large IPOs (pertinent point considering the size of Zomato IPO and the 38x demand received).
5. Strong Secondary Markets Help with Liquidity — A mixture of boredom, low interest rates and higher savings from lower discretionary spending appears to have pushed many individuals into investing during the lockdown. As with Robinhood in the US, India too saw a record jump in trading accounts (or “demat” as they are locally known) being opened with over 14 mn new ones in FY21 — an almost 3x jump over the previous fiscal! This indicates that Indian investors shifted their savings from traditional options like gold and bank deposits to alternatives like stocks. Companies appear to be betting on this bullish secondary market to float their IPO dreams.
6. Increasing Investor Maturity — In the age of the internet, newer investors and traders appear to be better aware of market ups and downs, volatility and more importantly, company financials. This was evidenced by the relatively lower retail participation (only 7.5x subscription versus 38x overall) in the loss-making Zomato. Knowledgeable and balanced views detached from institutional market hypes bodes well for both retail investors as well as India in the long run.
7. Alternative to China — A strong performance by Zomato could provide some much needed confidence to other new-age tech companies waiting to check the market performance before applying for an IPO. A slew of tech companies going public could then provide an alternative to global investors wanting to diversify away from China. Xi Jinping’s government recently canceled the IPO of Ant Financial, then proceeded to take the company apart. It is now targeting the likes of Didi Chuxing (whose stock has collapsed), Baidu, Tencent and over 30 other companies. Such a strong regulatory overhang in China might just be India’s moment to pull global investors away from our neighbour.
If media reports are accurate, there are about 30 companies planning to list this year. Some of the startups in this IPO pipeline have turned unicorn only after many years of venture capital investment. Chief amongst them are PayTM and PolicyBazaar, both of whom are still loss making. Digital payments provider Mobikwik and auto classifieds company CarTrade are other tech-enabled companies that have filings out in the public. If these IPOs are successful (and Zomato’s performance indicates they may well be), it could herald a new age of investments into India. We certainly hope so.
Concerns remain on whether this is all just a bubble and a “correction” is imminent. But whether you believe the hype or not, one thing is clear: This is the Year of the IPO. And it just might be India’s best year yet.
