Zomato offering: Investments by certain MF categories red-flagged as ‘high risk’

Market observers have flagged concern over investment by certain categories of mutual fund schemes in Zomato’s initial public offering (IPO) because the company appeared “high-risk”.

Nineteen MFS, through 74 schemes that include large-, mid-, and small-cap funds, as well as value, balanced advantaged, hybrid and dividend yield funds, have put in money in the company as anchor investors.

Experts have questioned the rationale behind the latter set of funds buying into the IPO, saying such funds are typically meant for conservative investors and Zomato appears to be a high-risk bet that could gyrate wildly on listing.

“Fund managers have always spoken about investing in companies with positive cash flows, profit margins, revenue growth, decent returns on equity or returns on capital employed, and a favourable debt to equity ratio. In that context, Zomato does not fit in. It is loss-making with a negative cash flow. Yes, these are changing times but at least the objectivity of the fund has to be maintained,” said Kirtan Shah, co-founder and chief executive officer, SRE Wealth.

A dividend yield fund, for instance, has to invest 65 per cent in equities, but predominantly in dividend-yielding stocks. A value fund is one that follows a value-investing strategy and seeks to invest in stocks deemed to be undervalued in price, based on fundamental characteristics and metrics such as low price-to-earnings and a price-tobook ratio.

“The mandates of MF schemes have not been tightly defined. That is why, for instance, you do not have pure-play value funds in India. So funds have a leeway and may make investments that are not aligned with the fund style. Investment in IPOS could also be driven by making short-term gains rather than staying put for the longer term,” said Dhaval Kapadia, director (portfolio specialist), Morningstar Investment Adviser India.

“One can argue that the fund managers have the leeway to invest anywhere. But that is not how it should be looked at practically. For instance, a large-cap fund theoretically has to put 80 per cent in largecap stocks and the rest can be invested anywhere, but that does not mean that the entire 20 per cent should be put in small-cap stocks. Fund managers need to stick to the larger objectivity of the fund,” added Shah.

Among the larger funds, DSP MF and Invesco MF have not participated in the anchor books, which included more than 180 names.

Sources said some domestic MFS were giving the issue a miss because it did not meet the profitability criteria and because of rich valuations. Several smaller AMCS that wanted to invest, on the other hand, have missed out as investment bankers typically prefer marquee names and larger cheque sizes as anchors.

“Zomato appears to be a highrisk bet and it is best for conservative funds to avoid exposure to the stock. The moot question is: What is the basic construct of the fund? Is it a conservative fund? Is it okay with high volatility? Is the fund buying the stock as a long-term play for purely for short-term gains?” said an MF official.

Zomato has a first mover advantage and is placed in a sweet spot as the online food delivery market is at the cusp of evolution. It enjoys a couple of moats and with economics of scale started playing out, the losses have reduced substantially, said analysts.

“However, predicting the growth trajectory at this juncture is tricky for the next few years. The valuation also appears expensive at 25x its FY21 enterprise value/sales, compared to average of 9.6x for global peers and 11.6x for Indian QSRS (quick-service restaurants). Valuing such early stage businesses on plain vanilla financial matrix might not give the right picture and may look distorted. Investors with a high risk appetite can subscribe for listing gains,” said a recent note by Motilal Oswal.