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Why I didn’t invest in the Zomato IPO

The initial public offering of Zomato (IPO) was not so much about the prospects of an internet platform for food deliveries, but about how people like you and me assess the “risk”. I’m not someone who decides on the irrational behavior of crowds in khuley-aam (except to vote with my earned rupee). Instead, in this column I present two sides of each dimension of the topic and leave it to you to determine your risk quotient.

To the: The topic is historic for startups. As Louis Armstrong would have sung, it was “an initial public offering to build a dream on.”

Against: If the stock fails to maintain its hype across market cycles (especially bears), the IPO could one day be positioned as the “marketing hoax that ruined investors” and do more harm than good to the startup movement.

To the: The success of the IPO confirms that investors believe in India’s insufficient consumption potential.

Against: The success seems to be more of an affirmation of a liquidity-driven world where investors create their own bubbles to justify reckless investments.

To the: The success of Zomato’s initial public offering is a ripening of financial marketing in India.

Against: The IPO success represents a temporary setback for the Deep Value School of Investing, which India’s largest steelmaker will be having with EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of Rs 6,916 billion for the fourth quarter of 2020-21 Valued at 52,000 crore, and a loss-making internet company several years away from EBIDTA positivity is rated higher.

To the: IPOs like this must be valued using new valuation standards that may not require posting a profit and still be considered successful.

Against: The three most important words in investing will be boringly “cash flows, cash flows, cash flows”.

To the: The increased net worth offers investors the security of a well capitalized balance sheet.

Against: The substantial capital injection prior to the IPO turns out to be too much of a coincidence and is seen by conservatives as an “incentive” to invest in the issue without being sufficiently convinced of the company’s profitability.

To the: Amazon hasn’t had to report a profit in nearly a quarter of a century, but it’s still valued unaffordable. Why should Zomato be treated differently?

Against: Without the cost of business development, Amazon would be among the most profitable companies in the world. Zomato must first prove that it can break even at the EBIDTA level without incurring business development costs.

To the: The internet platform business is about burning capital, getting low prices, attracting consumers, building sustainable market share and making profits in the future.

Against: The “sustainability” of a platform only exists as long as there is no new platform that can burn more capital, cope with larger losses and reduce larger market shares.

To the: Mutual fund investment in Zomato is a testament to serious investing in new age platforms.


Against:
Investing mutual funds – including those aimed at dividend yields – in loss-making companies with low profit transparency is an issue that may require regulatory scrutiny.

To the: The per-delivery u-turn in the company’s performance in a challenging 2020-21 year marks a turning point in the company’s business.


Against:
The “turnaround per delivery” has been described by a number of market observers as a case of “liberal accounting”, which is polite jargon for “accounting arbitrariness”.

To the: The zomato problem is reasonable considering that it affects only a fraction of a fraction of India’s 139 million people.


Against:
The Zomato issue was valued at 26 times its annual sales compared to Uber (8 times) or Just Eat (10 times), making the former possibly the most expensive IPO of its kind in the world. Its valued post-listing rating is higher than the combined market ratings of all Western-style Indian quick service restaurants (QSR) and Indian hospitality companies put together – that is, the person who brings me the food is more valuable than whoever makes it.

To the: Zomato is a visible brand that aims to generate sustainable market share.

Against: Zomato’s success could be its own enemy, attracting would-be fans who attract fundraising that only deepens the price war for food delivery.

To the: This time it’s different.

Against: “This time it’s different” are the five most dangerous words when you want to invest somewhere. You said that about a wind renewable energy hardware company that was once valued at over Rs 40,000 billion, which is now less than 20% of that historic valuation.

To the: The IPO was an excellent opportunity to buy cheaply.

Against: No IPO company leaves value for investors. (If it were, the merchant banker wouldn’t pay the full fees!) Also, how do you estimate that an infinite private equity (PE) ratio (as long as the net loss persists) compared to a hypothetical PE? Quota is “cheap”? (based on net income that could be decades away)?

And to finally answer what I did with my money last week, I didn’t invest in the Zomato IPO. I was distracted by a meal that Ramu had cooked at home.

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