Zomato share fall a lesson for startups

Zomato is again in news. After announcing acquisition of instant grocery startup, Blinkit for close to Rs4,450 crore, the food delivery internet company is on headlines again due to sharp fall in its share price. The company has lost around 20 per cent of its market capitalisation in the last one month. Currently, the stock is trading around Rs 44 per share against its listing price of about Rs125 per share. While the stock price has corrected a lot since its listing, the fall has aggravated this week. This was seen amid heavy selling after the mandatory lock in for the pre-IPO shareholders ended on July 23, 2022. The mandatory lock in ended after completion of one year of its listing for shares worth Rs613 crore. While the exact buying price of pre-IPO shareholders is not in public domain, many experts are of the view that those shareholders are sitting on hefty premium even at current market price of Zomato. Key shareholders of the company include Uber BV, InfoEdge, AntFin Singapore and Alipay, which are now able to sell their stakes now in the company. According to initial data collected from National Stock Exchange (NSE), 4.81 crore equity shares of Zomato worth Rs234.75 crore had changed hands on the early hours of trading on Monday.

While the sharp sell-off in the stock continues, brokerage firms are equally divided on the prospects of its valuation going ahead. While some brokerage firms see more downside to its valuation, many are of the opinion that its share price should do better going ahead. For instance, brokerage firm Jefferies has bullish view on the stock. In a note, it said that management has accelerated its journey towards better unit economics.

"Blinkit acquisition elongates the path to profitability and despite management guidance on a break-even in food delivery, investors are not giving much benefit of doubt," the report said. "Night is darkest just before dawn," it added. Notably, Zomato management in many interactions have said that they are confident of achieving profitability in the near future. However, the investors are not enthused much as Zomato kept on investing in many startups like a venture capital firm, some of which are not related to its core business. Interestingly, not only Zomato, share price of all new age companies that got listed last year has corrected sharply in the first six months of this year.

Given the fate of new age companies in bourses, investors are likely to stay away or at least be cautious of such listings in the near future. One critical lesson comes out of these listings is that capital market focuses only on numbers and investors draw a lot of comfort from profit and loss account than from management commentary.

So, it will be better for internet startups to attain profitability first before going public. This way, the market will not only give those companies value, but also management of those companies will escape the vexing questions on their business strategies. While India requires a vibrant startup ecosystem, the capital market is keen to have profitable ones raising money from the public.