Zomato struts its stock; Restraint should be the retail investor’s keyword

Zomato shares: Is investing a healthy proposition for retail investors?

It’s been a while since Zomato listed its shares on the bourses. The shares listed at a hefty premium indeed grabbed eyeballs and investor interest in huge numbers, making a mega debut for the company on the stock exchanges. It is now time to look at whether investing in Zomato stocks is a healthy proposition. 

If one looks at it from a retail investor’s perspective, reservation tends to rear its head. Lending an ear to a section of the analysts clarifies that it would be advisable for short-term investors to book profit. In contrast, long-term investors need to hold on so that they stand a chance to accumulate on a depression.

This also means that the stock wouldn’t be of any help in the short term other than keeping retail investors’ money on the ice. Though the stock had a blockbuster opening when it was listed, it is being foreseen by market experts that the stock is unlikely to bring in significant returns for some time now. 

A look at Zomato’s profile stats would throw up a stunner. Going by a Business Standard report, the market capitalization zoomed past the Rs 1-trillion mark. Significantly, this market cap figure is something even the conglomerates such as Indian Oil Corporation, Tata Motors, Shree Cement, and the like, haven’t witnessed of late. While the stock listed at a 53 percent premium against its issue price of Rs 76 per share on the National Stock Exchange, it was at Rs 115, which is 51 percent over its issue price.   

Zomato fundamentals, not much to celebrate about

Now, take a cursory look at Zomato fundamentals. Pre-IPO financials at Zomato had been nothing to celebrate. In fiscal 2021, it had made a loss of Rs 812 crore, while revenue plummeted by 23 per cent to Rs 1,994 crore! But yet, investors queued up for the stock on opening day. 

Why you would wonder! The answer lies in the way Zomato has made its presence felt. With a foothold in 525 cities and 23 countries outside India, 1.7 lakh delivery partners, 1.5 lakh restaurants it gets food for customers, and app loyalty from among 41.5 million customers; Zomato is a company that has delivered food and trust in an almost monopoly-like market place. We say ‘monopoly,’ not forgetting that Swiggy is its only worthy competitor on the Indian terrain.

Is that enough to make Zomato’s stocks ride high? The blind belief in the digital future, as an Indian Express analysis points out, could be one central prop for the stock. A loss-making company on the verge of losing more through continued investments rides high on the blind digital belief of the customers. 

Zomato profit levels could be a distant dream

As everyone is aware, the food delivery business is on a booming trend owing to the pandemic-induced closures of dine-in spaces. Predictions are that the food delivery business might pierce the $8-billion mark in a couple of years. But think what would happen when the Covid-19 pandemic eases out, and restaurants welcome customers to their dine-in avenues. Things are bound to change as food delivery might not remain a sustained option when normalcy returns. 

Over-valuation in stocks is to be seen with a clear frame of mind. There have been examples worldwide where confident; dynamic players had failed, failing to read the market well. 

As for retail investors, Zomato offers a few things to ponder upon before pumping hard-earned money, expecting speedy returns. Market players need to be aware that Zomato might take many years to reach a profit level. This could also mean that short-to-medium term fundamentals would present a bleak outlook as the stock will stay under pressure for a while. Retail investors need to book profits and exit in a phased manner. The levels the stock is at now offer an excellent opportunity to exit.

Tapping the history of the food delivery company would reveal that it has made losses and also would have added spending in the future. This points to near-impossible sustenance of growth rates. From now on, chances of losing restaurant partners, customers, and delivery partners could also come in the way of its growth. These would impact businesses. Looking at all these from an average investor’s point of view, gauging the company’s valuations would be difficult. 

These factors could be why foreign brokerages such as HSBC have applied a ‘reduce’ rating on the Zomato stock. Going by a Financial Express article, though Zomato’s share price zoomed 71 percent from its IPO price within weeks of listing, HSBC has stamped a ‘reduce’ rating on it. It believes that the long-term opportunity is real but adds that the market may end up over-estimating growth in the near term.

Zomato show calls for a wait-and-watch mode

In that context, retail investors need to wait and watch how the market would treat the Zomato share in the short term. A set of general investing rules apply here before retail investors take the plunge. They need to be aware of the company profile and performance. Understanding the company’s growth prospects is essential. Retail investors would need to research why Zomato has floated the IPO and where all it would pump in the money mopped up from the investor community.

Exercising caution on over-subscribed stocks would only be suitable for retail investors. That way, they would understand the nature in which the stock will perform in the short term. Lastly, clarity in judgment is a must. Hype all around would not mean you would gain by buying the stock. Desisting from falling to hype should be a rule to be adhered to.