Zomato's Stock Likely to Be Volatile on Speculation around Possible Exits by Some Pre-IPO Shareholders

Zomato's stock is likely to be volatile in the near term on account of market speculation around possible exits by some pre-IPO shareholders (VC/PE/Chinese investors) of the company as well as erstwhile shareholders of Blinkit who had received it under a share swap deal, JM Financial Institutional Securities said in a report.

“While we cannot accurately predict when (if at all) these shareholders would want to exit, we note that several of them are already sitting on sizeable gains, albeit a large chunk of it is unrealised. A few cues from past actions of these investors suggest that at least some of them would be eager to book profits post the recent run-up in the stock”, the report said.

So, a sizeable proportion of Zomato’s shares could be available for trade in the near term. In fact, the total value of the Zomato stock that all these investors hold basis CMP is Rs 180 billion. Even if one were to assume that only 50 per cent of the VC/PE/Chinese investor stake would be available for trade, the total short-term outflows could be close to Zomato's total IPO size of Rs 93.75 billion, the report said.

“We strongly suggest that long-term investors use these liquidity events to build a sizable position in Zomato as it not only offers a strong play on India's online food services market but is also, post the Blinkit acquisition, shaping up into a formidable diversified play on online retail”, it said.

Shares owned by ex-Blinkit investors will be tradeable from August 28. Zomato had issued fresh equity shares to all the selling shareholders of Blinkit as consideration for the M&A last year, at an implied per share price of Rs 70.76. Pursuant to the transaction, Zomato had negotiated a 12-month lock-in for these shares, compared to the statutory lock-in requirement of 6 months. BSE fillings and company disclosures suggest these shares will become tradeable from August 28, the report said.

A majority of these shares are owned by just three venture capital investors, namely, Softbank, Tiger Global and Sequioa. Note that only 50 per cent of the shares attributable to the Blinkit founder will be tradeable in the next few days; the remaining 50 per cent will continue to be locked in for another 12 months, the report added.

Several pre-IPO and ex-Blinkit investors are sitting on substantial unrealised gains, An analysis of the cost of acquisition of shares owned by pre-IPO and ex-Blinkit shareholders of Zomato suggests they are currently sitting on substantial gains on their investments, a large chunk of which is, however, unrealised.

Given the quantum of these gains and basis past actions of these VC/PE/Chinese shareholders in the listed internet names that recently went public we believe it is fair to say that a sizeable proportion of Zomato’s stock could be available for trade in large blocks in a not-so distant future, the report said.