Why did hybrid, GenNext and Digital India theme funds invest in Zomato's IPO?

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© Binu Panicker Why did hybrid, GenNext and Digital India theme funds invest in Zomato’s IPO?

A glance at the list of anchor investors for the initial public offering (IPO) of Zomato shares throws up many scheme names in mutual fund industry. The Rs 9,375 crore issue has mobilized Rs 4,196 crore from anchor investors. Of the 552.17 million equity shares allocated to anchor investors, 184.10 million shares were assigned to 19 mutual funds through 74 schemes. The issue price is Rs 76 per share. “This is a new-age business and we want our investors to benefit from the long-term capital appreciation,” says a senior official of a fund house on the condition of anonymity.

Schemes across categories are seen getting allotment of shares. Kotak Flexicap (2.17 percent), Franklin India Flexi Cap (1.93 percent), SBI Bluechip (1.73 percent) and Motilal Oswal Flexicap (1.58 percent) funds have got allocations. The numbers within brackets give the share in the anchor book allocations.

Not only equity schemes, but even hybrid funds applied for Zomato’s shares and got allotments. ICICI Prudential Equity & Debt Fund got 7.38 million shares which account for 1.34 percent of the anchor book. Moneycontrol reached out to ICICI Prudential, Mirae, Nippon India Life, Motilal Oswal, Axis, Sundaram and IDFC. However, they declined to comment on their investment since a mutual fund’s compliance rules don’t allow fund managers to comment on individual companies.

Strong appetite

The appetite for Zomato’s shares has been high. And it made many advisors and investors react. The steep valuations – around 29 times sales for a company that is yet to make profits – are a cause for concern. However, fund houses have their explanation for their move. “An established consumer business with the ability to scale up, with a strong promoter, tends to make a good investment in the medium to long term,” says a fund manager on the condition of anonymity.

Advisors, however, gave mixed reactions to the anchor book details. “Consumer behaviour is changing and so are businesses and their models. Fund managers are well aware of this and will continue to add emerging businesses, as and when they get listed,” says Ravikumar TV, founder of Gaining Ground Investment Services. “At what price they find those businesses attractive enough to add to the portfolio is an integral part of their stock-picking skills and will decide if they would make money,” he adds.

The scarcity premium is making many investors including mutual funds to go for Zomato’s shares. Many investors may be considering the stock for listing gains.

Finding logic in Zomato investment

Deepak Chhabria, Founder & Managing Director, Axiom Financial Services sees mutual fund investments in Zomato as any other securities transaction. “They are in line with the investment objective and asset allocation pattern stated in the scheme information document. Given the large size of the opportunity and very few listed companies in this space, fund managers are going for the shares of Zomato. However, elevated valuations are a risk, he adds.

Vinod Jain, Principal Advisor, Jain Investment Planner says, “The number of shares allotted to each scheme won’t be a large holding of those schemes. So there may not be issues pertaining to liquidity. Also, mutual funds have the advantage of being invested for the long term and benefiting from future growth.”

Like all other businesses, food delivery has its own risks and the steep price paid today for future profitability further adds to risks investors are exposed to.

“Businesses like these are disruptors. And like many such businesses, it has built market share by under-pricing its product. The assumption is that at some point of time, the pricing policy will change to make profits and justify the high valuation. It is necessary to survive till then…if it doesn’t then the investor loses. As long as this uncertainty is factored in to the investment decision, it is fine,” says Srikanth Bhagavat, MD and Principal advisor, Hexagon Capital Advisors.

Put simply, if the company takes longer than expected to make profits, the market may not continue to offer steep valuation to the stock. The share price may come down.

Though there is a lot of optimism around the listing premium of Zomato, only time will tell if the shares make money for mutual fund investors.