Zomato listing to provide shot in the arm to startup ecosystem

Market players say strong stock market debut will prompt VC and PE firms to back more domestic startups, apart from motivating more unicorns to resist the temptation to list in the US

Topics
Startup | Zomato | Paytm

The enthusiastic response to Zomato’s initial public offering (IPO) and the listing day surge is likely to act as a big boost to the startup ecosystem. Market players say the successful stock market debut will encourage venture capital and private equity investors to back more domestic startups. Further, it will motivate more unicorns, unlisted firms worth more than $1 billion, to resist the temptations to list in the US make their debut overseas.

The food-delivery company’s Rs 9,375 crore maiden offering was considered a test case for other tech and start-ups waiting in the wings to go public. Zomato’s IPOs drew bids worth Rs 2.1 trillion as it was subscribed 40 times. On Friday, the stock ended with a gain of 66 per cent.

Many see this as a sign of a mature capital market and a sign that domestic investors are open to back companies that are not making any profits or conform to the normally accepted benchmarks.

“The stellar debut of Zomato on the domestic bourse after attracting robust subscription is a testimony to the fact that investors are willing to bet big on new-age technology companies which have the characteristics of a disruptive business model. With growing internet penetration and the number of smartphone user base increasing month after month, the entire private digital ecosystem will enable wealth creation and further deepen our capital market in the coming years,” said S Ramesh, Managing Director and CEO, Kotak Mahindra Capital Company.

Zomato’s losses widened every year between FY18 and FY20 from Rs 107 crore to Rs 2,386 crore. However, the cash burn has helped the company grow its top line five times from Rs 466 crore to Rs 2,605 crore.

Paytm, Nykaa, Policybazaar, and MobiKwik, among others, are waiting in the wings to launch their IPOs.

For large startups the US market is considered to be a preferred destination. A few domestic companies such as travel portal Makemytrip have therefore opted to list there as Indian investors were seen as hesitant to pay the kind of valuation private equity investors or the US markets pay.

However, Zomato’s listing has quashed these notions. Investment bankers said listing in the US does not necessarily give companies access to more investors than India. Listing in Indian markets offers companies an additional pool of institutional investors in mutual funds and insurance companies apart from foreign investors. And listing in the home market is a significant boost to the brand and creates excitement, which does not happen if they list in the US.

However, some say it is too early to conclude if Indian markets have matured to accept loss-making unicorns.

“We are seeing the mother of all bull markets for primary and secondary markets. And it is not just for Zomato. You see, the stocks of hotels, airlines, even companies that have turned their networth negative, hitting record highs. One should not take this as proof of domestic investors getting comfortable with loss-making companies. We will have to wait and see if this trend sustains for the next 3-6 months whether more unicorns find the support Zomato got,’ said G Chokkalingam, Founder, Equinomics.

Ambareesh Baliga, an independent analyst, termed Zomato’s reception as an investor frenzy associated with bull markets.

“People are pouring money and expecting Zomato to perform. Such people are outnumbering those who are cautious based on fundamentals. As long as they outnumber cautious investors, the stock will move up,” said Baliga.

Baliga added that most investors are chasing momentum, and the enthusiasm will disappear once investors start making losses.

“As long as they are making profits, the confidence level is high. But every day is not a good day in the markets. You have a long bull run, and then it collapses very badly.”

Further, analysts said that the listing would put a lot of pressure on Zomato to turn profitable and other unicorns planning to list need to be aware that handling public investors is very different from handling private equity investors.

“Now everything related to you, including the financials, are in the public domain. Earlier, no one bothered about your financials except the private equity guys. And you will have pressure every quarter, and they were dealing with savvy investors earlier, which is no longer the case,” said Baliga.