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Shares in Zomato, a food-delivery company and the first of India’s tech groups to go public, rose as much as 80 per cent on debut in a vital test of investor appetite for the country’s cash-burning start-up scene.
Zomato’s shares surged to a high of Rs138.90 ($1.87) from their issue price of Rs76 in early trading on Friday. The initial public offering, which was about 40 times subscribed, had been closely watched by a number of other richly valued companies that are expected to go public in the coming months.
India’s fast-growing tech groups had previously relied on foreign venture capitalists to fund their often lossmaking businesses. But regulatory changes enabling unprofitable companies to list have encouraged several start-ups, led by Zomato, to look to public markets instead.
“This is the first company in India, in my memory, that has gone for an IPO in India without turning a rupee of profit,” said SR Srinivasan, an independent investment adviser. “It shows the level of maturity in the market. Hopefully, it’ll be positive, but I’m guarded.”
It has been a rollicking year for Indian stocks, which have followed global equity markets to records this year. The Bombay Stock Exchange’s Sensex index has climbed more than 10 per cent, hitting an all-time high last week.
The bullish mood has encouraged a stream of listings, with companies raising $3.9bn in the first half of 2021, according to Refinitiv, the most since the global financial crisis.
Zomato’s IPO, the largest in more than a year, is set to be followed by that of Paytm, a New Delhi-based payments group that filed a draft prospectus last week. As with Zomato, Paytm is backed by Chinese billionaire Jack Ma’s Ant Group. It is also lossmaking.
Several other Indian tech groups are believed to be waiting in the wings, including Walmart-owned ecommerce group Flipkart.
Proponents hope the string of listings will give equity investors an opportunity to participate in the growth of India’s tech sector, as US shareholders enjoyed through companies such as Amazon or Facebook.
They are also betting that Indian companies will benefit indirectly from a regulatory crackdown on Chinese tech groups that could prompt global investors to search for opportunities elsewhere.
Chinese authorities hit ride-hailing business Didi with a data security probe days after it raised $4.4bn in a New York IPO last month, sending Chinese tech stocks tumbling and threatening what had been a lucrative market for Wall Street banks.
But Zomato and its peers face challenges of their own. For one, analysts are sceptical that Zomato, which reported a net loss of $110m in the year to March, has a plausible path to profitability.
Its economics have improved thanks to the boost to food delivery groups during the coronavirus pandemic, but order values remain low by global standards. Some analysts believe that mark could fall further as Covid outbreaks wane and people return to eating out.
Indian tech companies must contend with regulatory challenges of their own as the government looks to exert more control over user data and foreign investment.
The government last year introduced curbs requiring investors from China to seek official approval, which prevented Zomato from receiving new financing from Ant.
“There’s a lot of money going in. But we have to look at the fundamentals: is there profitability, is the company good?” said Roopa Venkatakrishnan, a director with Sapient Wealth Advisors and Brokers in Mumbai.
“Profitability, because of the way the business is, may be two, three, four years down the line. But it’s something where people will have to invest for the long-term,” she said. “Today, with the euphoria, people invest with a very short-term view.”
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