Zomato stock prices Tuesday plunged by approximately 13 per cent to Rs 41.20 apiece intraday, a new all-time low, as the one-year lock-in period for the pre-IPO investors ended.
On July 26, the Zomato stock price ended at Rs 41.60 from its opening levels of Rs 46.60, a sharp 12.61 per cent intraday decline. The stock has tanked 75 per cent from its all-time high of Rs 169.10 per stock, touched last year in November.
Although the stock was in free fall for the last few months, the nosedive was stark in the past few days as the one-year lock-in period for pre-IPO investors drew to an end on 23 July 2022, exactly a year after Zomato Limited was listed on BSE and NSE.
The food aggregator’s paid-up capital of the one-year overhang is around 78 per cent, which means it had roughly 78 per cent of total equity. It is a company with zero promoter holdings, which as per the rules, makes it obligatory for it to lock the equity share capital it holds for a period of one year from the date of allotment of shares. During this period, these shareholders are barred from selling any equity.
The latest fall in the Zomato stock prices could, therefore, be attributed to the selling pressures spurred by the end of one-year lock-in period as sellers fell over themselves to dispose of their stock holdings in anticipation that the stock prices will plummet further more.
Back in July 2021, the listing of Zomato on stock markets was greeted with great euphoria among the investors. Ahead of its launch, the IPO was subscribed 38.25 times, with 7.45 times in the retail category, 51.79 times in QIB, and 32.96 times in the NII category, signaling the enthusiasm it had generated among the prospective buyers.
As expected, the Zomato IPO opened at at Rs 116, a premium of 53 per cent compared to the issue price of Rs 76. Over months, it rose to its all-time peak of Rs 169.10 as investors rallied behind the food aggregator service with the hope that it will provide them with windfall gains.
Causes behind the steady decline in the share prices of Zomato
However, in the intervening months, the enthusiasm among investors has evaporated, partly because of its weak finances, especially in the wake of its deal with Blinkit, formerly known as Grofers, and which analysts claim have elongated its path to profitability and achieving break-even.
Earlier last month, Zomato announced its acquisition of loss-incurring firm Blinkit for Rs 4,447 crore. The payment will be settled through issue of around 629 million Zomato shares (around 6.88 per cent equity dilution on fully diluted basis) at the prescribed preferential allotment price of Rs 70.76, and cash acquisition of Hands on Trades Pvt Ltd for Rs 60.7 crore.
However, the stock market and analysts alike felt the Blinkit deal was overvalued that reflected in the stock movement of Zomato after the announcement of the acquisition, tumbling more than 14 per cent in two days since then. Researchers believe acquiring Blinkit will add to the woes of Zomato which is already marred with high operating losses.
Following its deal with Blinkit, Punit Patni, Equity Research Analyst at Swastika Investmart, sounded alarm for Zomato, adding that the deal may bear down heavily on the company’s finances and it may take a long time for the organisation to figure out the unit economics and turn profitable. He also said that the current markets are not conducive for businesses that are witnessing profitless growth.
According to research agencies, several factors are responsible for Zomato stock’s current free fall. An increase in competition from new entrants, competition from existing competitors such as Swiggy, and the restaurants offering direct delivery are among the primary factors that have adversely impacted Zomato’s business.
Amidst dire finances, Zomato is facing stiff pushback from its existing partners as restaurants have started resisting the huge discounts imposed on them and severing their ties with the food aggregator service. So far, the company’s strategy entailed forcing restaurants to offer jaw-dropping discounts to tether customers permanently to its services.
But the strategy seems to have backfired as restaurants are resisting the huge discounts imposed on them, snapping their ties with Zomato and either going solo or platforming themselves on rival companies that have relatively less stringent requirements.
Slower than expected market growth has forced a reassessment among investors about Zomato’s overall potential. While most food delivery companies across the world witnessed a slump in the last two months, Zomato has underperformed its peers, said Ms Madhu Sharma, an independent market analyst based out of Mumbai. Most global food aggregators bottomed in May-June, Zomato continued its decline in July.
Strict regulations on platform businesses and challenges in expanding its business outside its core area are other headwinds facing Zomato, adding to its extant miseries and throwing questions at the company which it clearly does not seem to have answers to, at least for now. Taken together, these factors have contributed greatly to the current bout of decline in the Zomato share prices.
Zomato has a hard row to hoe as investor confidence wanes and company registers profitless growth
However, market observers and research companies believe that Zomato can turn the tide in its favour, given that it is the fastest-growing food aggregator company among its peers. In terms of order volumes and gross revenues, Zomato has outpaced all its global competitors, namely Just Eat Takeaway, Delivery Hero, DoorDash and others.
Restaurant food accounts for less than 10 per cent of overall food spending in India, as compared to close to 50 and ~45 per cent of food spending in the US and China, respectively. Those pinning their hopes on Zomato to stage a comeback are banking their hopes on the food aggregator’s ability to benefit from India’s expected growth in online food spending and turn profitable with it.
But for now, Zomato has a hard row to hoe, reflected in deflating investor confidence and declining stock prices. Until it pulls its act together, its share price may continue with the free fall.
