With Food-Tech platform Zomato’s Rs 9,375 crore initial public offering (IPO) being oversubscribed by 38 times, the focus now shifts to July 27, when the company’s shares will be listed on the stock markets for trading. As the first Indian ‘unicorn’ – a startup valued at $1 billion or more – to come out with an IPO, Zomato has created a special place for itself in India’s startup history.
Moreover, the Zomato IPO – the most high profile of the year so far – is also emblematic of the ‘IPO spree’ being observed in 2021 amid the crippling Covid pandemic.
Generally, a booming stock market often provides the fertile ground for an IPO spree. “Primary market (IPOs) is closely linked to the secondary market (share market). Whenever the latter is performing well, companies line up for IPOs,” said Hitesh Punjabi, Asst. Professor, KJ Somaiya Institute of Management Studies, Mumbai, while referring to the stock market boom of mid-2000s and the buzz around Reliance Power’s IPO in early 2008.
In FY21, which covered the period of the Covid-induced lockdown and several ‘unlocks’, the BSE Sensex rose over 68 per cent and NSE Nifty 50 index rose by 71 per cent. In FY 21, over 20 IPOs listed at a premium to their issue price, according to Equitymaster.
Sample this: Happy Minds, an IT consulting company, reported a 111 per cent gain on listing – the biggest in a decade. Its share was issued to the public at Rs 166 and opened higher by 111 per cent at Rs 351.
Kiran A Shah, Co-founder and CEO, SRE Wealth, says, “Sectors like chemicals and IT, and tech companies are doing well amid the pandemic.” While the rapid push for digitisation during the Covid-19 pandemic has been credited for the strong IT and tech sector performance, the boom in chemical sector has been linked to developments in China.
Lalit Kumar, Founder of Chennai-based LKR Advisors, explains: “The boom in chemical sector is predominantly due to the environmental norms in China where 40 per cent of its chemical manufacturing capacity were shut down for safety inspections.”
The boom in chemical stocks since the last year has meant that many of the 20-odd IPOs since last year were from the sector. Clean Science, a speciality chemical firm’s IPO was oversubscribed by 93 times on July 9 and the shares listed at a premium of 98 per cent on the BSE on July 19.
At a time when reports of economic distress in India have been aplenty, the boom in the stock market is sure to puzzle those not familiar with its working. Market observers say that the exponential rise in demat accounts – signifying the rise in new retail investors – and the massive influx of global money into the stock market is fuelling the “bull run”.
“A lot of youngsters have entered the retail market during the pandemic. In fact, Paytm said 27 per cent of the Zomato IPO applicants were under the age of 25,” Mr Shah said, adding that low interest rates are also encouraging people to invest in stocks. As per the CDSL and NSDL, Indian investors opened a record 1.42 crore demat accounts in 2020-21. “The pandemic has been a blessing in disguise for the markets. Many millennials sitting at home are now investing,” Mr Kumar said.
India saw record foreign portfolio investments (FPIs) of Rs 2,74,034 crore in FY21. Bloomberg, in addition, states that foreign investors have invested over $8 billion in India this year (till mid-June 2021). This has helped the market remain flush with liquidity since over a year. For the uninitiated, FPIs are investments by foreign residents in securities including shares, government bonds and corporate bonds etc.
“IPOs at Nasdaq have raised $50 billion from January to June 2021. India raised $5bn as against $2.5 billion last year during the same period. Non-institutional investors are bringing liquidity in the market purely from short term funding at 3.75-4.5 per cent for listing gains,” says Mr Kumar, highlighting the buoyant global markets.
Given the buoyancy in the markets, IPOs seem to be a viable option for companies and investors alike. Nonetheless, many IPOs this year, experts say, will be unique. “New business models are coming to tap the markets this year,” says Mr Punjabi while referring to the new-age tech companies like Zomato, Paytm and Mobikwik among others.
The challenge will lie in valuing such new-age companies whose business models, with years of losses prominent in their profit & loss statements, are quite different from those of traditional companies.
“It is very difficult to value digital firms unlike traditional firms. These companies can grow enormously too,” says Mr Shah. Mr Punjabi however recalls how Infosys too had faced such an issue when its IPO hit the market in 1993. “Analysts could not decode a method to value it as the IT was a new sector. However, many years down the line, we now know how such companies are to be evaluated.”
Hence, Zomato’s recently-ended IPO has also come under the lens of analysts for its long-term viability.
“Zomato is highly priced. During the pandemic, it has done well. But once things go back to normal, people will like to go back to eating out. We need to see if Zomato will be able to handle such a situation,” notes Mr Shah. However, he also sounds hopeful, adding that Zomato can be the torchbearer for ‘unicorns’ who are planning to go for an IPO in the future.
Mr Kumar is less enthusiastic about Zomato’s prospects. “Zomato has not been able to make a profit since the start. For it to make a profit, it needs some heavy lifting and Rs 9,000 odd crore infusion may not be enough,” he said.
The current upswing in the stock market has already triggered some murmurs of a possible bubble burst in the future.
Mr Punjabi says that the gains Zomato shares accrue on the listing day (July 27) will be key. While over-subscription does help build expectations of bumper gains, any negative factor coming to play that day could lead to investors gaining only marginally, he added.
“For the long run, I would suggest people to wait and watch the financial performance of the company for a while.”
Mr Kumar believes the IPO market is in a bubble which won’t burst right now, but when the market settles down and liquidity goes down. “We may see a fall of 30-40 per cent in recently-listed stocks,” he argues.
Amid the euphoria of a raging IPO market and a surging stock market, the dire situation of India’s real economy continues to be a contrasting reality.
Take these numbers for a perspective:
According to Confederation of All India Traders (CAIT), localised lockdowns during the second wave led to losses of Rs 15 lakh crore in April and May 2021. According to the Centre for Monitoring Indian Economy (CMIE), 1 crore Indians have their jobs due to the second wave of Covid-19. Ninety-seven per cent of the households have faced loss of income since the pandemic-induced restrictions began in 2020, it added. Fuel prices are over Rs 100 in all major cities, adding to the high retail inflation in India.
What explains this dichotomy? Mr Shah said the stock markets are basically forward-looking, where people trade keeping future potential earnings of a company in mind. Mr Punjabi concurs with this, but adds that the stock market has already discounted the disruptions in the real economy and is expecting better economic prospects in the next 6-8 months. “If things do not go as expected, then we may see the stock market going down in the coming months,” he argues.
“Bigger companies have grown bigger in the last one year. But smaller MSMEs have struggled and many have shut down too,” Mr Kumar observes about the real economy.
Anjela Tarneja of Oxfam India, a non-profit organisation based in Delhi, dismisses any connection between the stock market and the real economy hit by the pandemic. “Much of the rise of the stock market is a result of international investments in Indian companies. Indeed, the RBI had warned that the surge in stocks ‘poses the risk of a bubble’.” In fact, she bats for a more multi-dimensional measure that measures different socio-economic dimensions than a single unit metric like stock market or GDP growth.