Zomato IPO: Retail investor quota may be small as firm is yet to start making profit

Zomato has set the ball rolling for its much-awaited initial public offering (IPO) after it filed the DRHP earlier last week.

Zomato has set the ball rolling for its much-awaited initial public offering (IPO) after it filed the DRHP earlier last week. The food delivery service provider is now a household name in India and one of the many unicorns that the country houses. But, the papers filed with SEBI reveal that till the end of 2020, Zomato has not managed to turn profitable. Although retail investors have been eagerly waiting for the Zomato IPO, the company’s inability to record profits will lead to the retail portion of its issue being capped at not more than 10%, leaving individual investors with only a small piece of the pie.

According to the DRHP, Zomato reported a loss of Rs 682 crore in the nine months ending December 2020. Previously, In the financial year 2019-20, the company had a net loss of Rs 2,386 crore, up from Rs 1,010 crore in the financial year 2018-19. Although the company reported a jump in revenue from Rs 1,397 crore in FY19 to Rs 2,743 crore in FY20, its expenses have increased from Rs 3,608 crore to Rs 5,006 in the same period. To add to this, Zomato has no plans to control its expenses going forward but instead plans to spend more. “We have a history of net losses and we anticipate increased expenses in the future,” Zomato said in the DRHP.

SEBI rules to keep retail portion capped

“As per SEBI rules, if a company has not clocked net profits for the last three financial years, the firm is allowed to come for a listing but has to keep only 10% of the issue reserved for retail investors,” Aditya Kondawar, Founder and COO, JST Investments told Financial Express Online. He added that in such a scenario a minimum 75% of the portion will have to be reserved for Qualified Institutional Buyers (QIB), while the remaining 15% can be for Non-Institutional Investors.

Even if Zomato manages to turn profitable before the company files its RHP, the retail portion will have to stay capped at 10%. Investors, both domestic and foreign, have been eagerly waiting for India’s tech unicorns to line up for their stock market debut. A recent Credit Suisse report stated that India has more than 100 unicorns. With investor interest anticipated to be high in Zomato’s Rs 8,250 crore IPO, smaller investors will be scrambling to get their hands on shares of the company when it hits Dalal Street. The issue size could get even slimmer if Zomato goes ahead with its planned pre-IPO placement.

Investor interest still strong

However, the company’s inability to generate profits at this juncture, according to many, is not going to dull the investor sentiment surrounding the firm. “Zomato will be the unicorn of India’s startup hence will be keenly watched and although it’s a loss-making company will get lots of interest as the prospects for the future looks promising,” Jitesh Ranawat  Head Institutional Sales at Marwadi Shares and Finance told Financial Express Online. He added that investors will need to keep faith in the company as it plans to pump millions of dollars into advertising, promotion and expansion in new markets within India to develop its platform and expand the delivery network.

Investors do tend to invest based on the expected rise of an idea and similarly, Zomator might attract investors. However, Aditya Kondawar highlighted that Zomato could soon face competition from not just its arch-rival Swiggy but also Jeff Bezos’ Amazon which could disrupt the food delivery industry going ahead.