What caused a bumper rally in Zomato stock on debut?

The stock of Zomato settled at Rs 125.85, up 65.59 percent, against its issue price of Rs 76 on Friday. Let’s look at some of the reasons behind the stellar listing

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The public listing of Zomato culminated with the stock opening at a massive premium on Friday, much ahead of analyst’s expectations that pegged the stock to list at about 30 percent premium over the issue price of Rs 76.

The stellar listing took the market capitalisation of Zomato beyond the Rs 1 lakh crore mark, albeit briefly. The stock finally settled at Rs 125.85, up 65.59 percent on Friday.

Let’s look at some of the reasons behind the stellar listing

Huge demand From investors

Strong participation, especially from institutional investors and foreign funds amid a limited number of available stocks may have lead to the stupendous rise in Zomato stock, experts say.

The overwhelming response to the IPO indicated that the demand was expected to be strong considering the business model that Zomato has. The offer had received over Rs 2 lakh crore of bids with qualified institutional buyers bidding for Rs 1.5 lakh crore worth of shares alone, against their reserved portion of Rs 2,955.15 crore. Therefore, those who missed out on allotment or received less than investible amount may have continued to buy the stock on listing day.

“Lot of institutional investors in the IPO participation did not get shares given the overwhelming response, which indicated that there was a huge appetite for shares of Zomato and the IPO could not fulfil that demand. Hence, they collected from the secondary market. The structured institutional money is flowing into Zomato,” Parvati Rai, Head-Research at KRChoksey Research told Moneycontrol.

Prashanth Tapse, VP Research at Mehta Equities said in the anchor book, few dividend yield funds like ICICI Prudential Dividend Yield Equity Fund invested in Zomato which was quite surprising.

The buying appetite from retail investors was also seen as Zomato priced its issue very smartly at Rs 76 per share considering their in-depth study in consumer behaviour, which normally looks cheap for retail investors, experts feel.

First mover advantage and unique business

“Generally globally investors are more interested in unique business model instead of old-style of business like other IT companies which are over-owned now,” said Prashanth Tapse, VP Research at Mehta Equities.

Even though Zomato is loss-making, the company has reduced the shortfall to Rs 816.4 crore in FY21 from Rs 2,385.6 crore in FY20, while the earnings before interest, tax, depreciation and amortisation (EBITDA) loss dropped significantly year-after-year, to Rs 23.4 crore in FY21 from Rs 88.5 crore in FY20 and Rs 170.9 crore in FY19.

Zomato is the first unicorn tech company listed on exchanges. The company is one of the leading players in the food-tech industry in India with a market share of around 45 percent.

Zomato offers multiple services through its food platform in the form of search and discovery, food delivery, customer-generated content, Hyper pure and loyalty programs such as Zomato Pro.

Also, “With the changing dynamics, the need for outside food has seen an increase which gets fulfilled by either going out to the restaurant or ordering food from the restaurants. The millennial population have a greater tendency to eat and explore different cuisines across restaurants. Zomato is the one stop app that provides these customers with details such as photos of the menu, photos of the restaurant premises, address and GPS coordinates, phone number, website, social media presence, cuisine, opening timings, average cost for a meal, free parking availability, indoor or outdoor seating availability, free Wi-Fi availability, whether the restaurant offers live entertainment, has a smoking room, whether table booking is recommended, among others,” said Meet Jain of LKP Research.

Hence, the first-mover advantage enjoyed by Zomato IPO is creating an example for other tech-based start-ups – PayTM, Mobikwik, Cartrade, Policybazaar – to launch IPO in the coming period and the market was not worried about loss making status of the company, said Astha Jain, Senior Research Analyst at Hem Securities as well as Gaurav Garg, Head of Research at CapitalVia Global Research.

Preponement of listing

Zomato preponed its listing by two days to July 23 instead of July 27. “This clearly shows its efficiency in execution of strategies well in advance and the management’s aggressiveness towards implementation of systems in a short period of time,” said Gaurav Garg.

Info Edge remains a shareholder

Info Edge, the early and key investor of Zomato, retaining the majority of its stake in the food delivery giant is also one of the major reasons for boosting confidence among investors. Info Edge holds 15.23 percent stake in the company now, compared to 18.68 percent stake in pre-offer.

Shorting In grey market and positive market sentiment

“A lot of people shorted Zomato ahead of listing in the grey market, which they must have covered it in the secondary market. This could be one more key reason for the rally in Zomato stock,” said Parvati Rai.

Also, the positive sentiment in the equity market supported Zomato’s debut. The market gained 1.4 percent in the last three days of the week gone by.

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