The size matters
Last week on the 14th July, 2021, Zomato, the food aggregator company launched an Initial Public Offering (IPO) of Rs 9,375 crore. It was one of the largest ever IPOs to be launched by an Indian company that created an unprecedented rush among investors. Indian social media was also abuzz with the news related to this mega IPO by Zomato. The IPO was subscribed almost 52 times in the institutional buyers’ category, and 33 times in the non-institutional investors. Overall, the IPO was subscribed approx. 38 times of its original size.
Why are investors so gung – ho about an IPO, and that too from a company that came in the news for only a few years? Is such enthusiasm and interest justified for a fresh IPO with an economic crisis looming large? Let’s find out how good or risky this investment is for an ordinary person. In fact, when the IPO opened last week for the general public, retail investors went berserk and entire shares were sold in the first hour itself.
The Great Rush
Was investors’ rush to own shares of the food aggregator inspired by the huge online orders that Zomato received last year? This could be possibly true, because for almost a year and half due to the raging Covid 19 pandemic, we were literally living within four walls of our homes. And you must be wondering whether you should invest in the Zomato IPO or not?
We were actually driven by the marketing campaign on Indian social media by Zomato – India’s first start-up food-aggregator company, with a market value of billion plus US dollars that is more than any of the established brand’s value in the hospitality sector.
You must be tempted, isn’t it? After all, its shares are trading at a premium of around Rs 10 in the gray market. The company is full of confidence. And in just three months of applying to SEBI, its offer size has gone up to Rs. 1500 crore and value to Rs 15,000 crore. There are reports that big foreign investors are eyeing interest in IPO.
They all sound great, but the million dollar question is – should you buy shares too? And if you must, then how many? Can you get only 100 shares even if you put all your savings in it?
Is it Risk or Greed?
There may be some confusion in your mind. Tell me, how old you are at present. Nineteen years. And you have just entered the equity market during Covid-19. What made you do this? Well! Maybe for the last sixteen months you have been sitting in front of a computer screen all day. And when your friends started trying their hands in the stock market and told you how much profit there is, it became impossible for you to control yourself.
Who can stop anyone from investing in the stock market when the Nifty index doubles from 8000 to trade at around 16000 in a quick time? I know your elders always advise you to stay away from three things in life – smoking, drinking and investing in stocks – never do this. They keep saying, “It’s akin to gambling that has ruined the lives of many. Never ever do this, keep your money in the bank’s FD.” In a way, it’s true. The attraction of the stock market, and the urge to earn quick bucks is like a drug addiction that is replete with risk, fear and greed.
You are contemplating – should you ignore the IPO, or go ahead like others and try your luck? And suddenly your little sister walks inside the room. She has a sharp mind and is full of questions. And there she quips, “Bro! Tell me. Why is everyone crazy about Zomato’s IPO? Don’t they know the company is in huge losses? Listen to me. Last year, they sold food worth Rs 2,605 crore, but suffered a loss of Rs 2,386 crore. I think you will make the same mistake you did with bitcoin. You bought it for $60,000 but within a few weeks the price crashed to $30,000. So be careful this time.
It’s the Wrong stock at the Wrong Time
After hearing the little gem of advice from your sister, you thought, why not find out what is the real value of Zomato. All the food-tech companies in America, China and Europe are running in losses. So, what is something new happening with Zomato? Zomato is looking to collect an amount much bigger than their year’s earnings.
Yes, you heard me right. Zomato is flying a little higher – almost eight times. But this is not something happening for the first time. The main problem is that four out of six overseas stocks in the food business have given negative returns this year. The only exception is DoorDash, an American company that has given a positive return. Therefore, the high pricing of Zomato’s IPO is not at all justified.
With so many uncertainties in the stock market, you end up asking a veteran investor, ‘Sir, what should I do? Should I buy Zomato IPO with my hard earned savings? You will most probably get a reply, “My dear friend! There are two things you should never do in the stock exchange. Never ever buy the shares of a good company at the wrong price, or a bad company’s shares at a good price. In both cases, you will eventually suffer, because what is more important is that you must buy the shares of a good company at the right price. Besides, you also need to decide whether you can hold the equity for a long time.
You will have to bear with the ups and downs of the market till you get good returns. There is no doubt that Zomato is a consumer internet platform whose growth has been phenomenal in the last two years. But the bottomline is, it’s too expensive at this price. It will take years – maybe even a decade or so – to increase its value in the stock market. And like bitcoin, it can also face massive ups and downs in the market, dealing with unforeseen circumstances. Are you prepared to withstand these changes?’
Your stock reply would be “No sir! I know how terrified I was when my bitcoin investment collapsed in a matter of days. I am just a middle class young man. You cannot bear with so many ups and downs. The older man may say, ‘Well! Ideally you should wait for stock to grow in value. Leave this IPO to the big investors who can hold the stock for years. They know it better than anyone that rapid changes do take place in the digital world. They have the capacity to bear the loss when the prices fall. Similarly, when the prices zoom, they know how to take advantage. You have neither the skill, nor the ability or the means. So, don’t go for this IPO.
My advice to you will be, “Let big boys play this game while you do what is good for you. For now, enjoy that delicious Pizza from Dominos that you have just ordered from Zomato.”