These 5 mutual funds are investing in Zomato IPO: Should investors be worried?

The enthusiastic participation of mutual funds in Zomato’s IPO last week surprised many. The fixed-book portion of the public offering received registrations from 19 mutual fund companies across 74 programs with different mandates. Questions are being raised about the noisy buying of shares in a business that is not yet making a profit but sets a hefty price tag. It has been found that asset managers have turned a blind eye to metrics such as earnings visibility, cash flow, and capital return – among other metrics they claim to be highly focused on.

Feroze Azeez, VP, Anand Rathi Wealth Management, feels the bet size is too low for investors to bother. “As long as the allocation is granularly distributed and does not constitute a fraction of the asset base of any fund, investors should not be unduly concerned,” Azeez said. The total allocation of the funds at the IPO stage amounts to almost Rs 1,400 crore, which hardly makes a dent on the basis of their total assets.

Five Biggest Mutual Fund Investors in Zomato .’s IPO
But their allocation to the food delivery company is only a fraction of their asset base

Schema name Amount allocated (Rs crore) Fund Instruments (Rs crore) The amount allocated is % of the corpus
Kotak Flexi Cap 91.1 36.355 0.25%
Franklin India Flexi Cap 82.0 9.488 0.86%
SBI Bluechip 72.7 28.580 0.25%
Motilal Oswal Flexi Cap 66.3 11,884 0.56%
Mirae Asset Large Cap 60.0 26.747 0.22%

Financial Fund on June 30
Source: Zomato

Some fund managers feel it is simply impossible to ignore an IPO as famous as Zomato, because of their constraints. “With a post-IPO market cap of Rs 65,000 crore, Zomato will eventually move to large-cap indices. Since most active funds are index-conscious, nearly all of the funds are. Large-cap and flexible-cap will need to have it in their portfolio.” Vikas Gupta, Chief Investment Strategist, OmniScience Capital, commented. Large-cap and flexible-cap funds were among the biggest sources of money for Zomato’s IPO, with the exception of a few funds with bent themes like technology, consumption, and special situations.

What leaves many scratching their heads, however, is that Zomato stock is being bred by conservative funds such as value, dividend yield, and hybrid portfolios. Some argue that traditional valuation metrics cannot be used for internet or technology-based companies because the initial cash burn and investments tend to be higher. But without immediate clarity on how to properly value these companies, getting them into the value zone is a pain, feel the experts. Azeez emphasized: “Zomato finds space in the value fund that goes against the basic tenets of this philosophy. With the company never making a profit to date, and the path to profitability still unclear, it’s confusing to see its stock used in a dividend yield fund.

“Sebi allows funds to deviate, so they don’t go against the rules,” Gupta argues. But there’s definitely a disconnect with the risk profile. Arun Kumar, Head of Research, FundsIndia, said: “If the choice of a new listing is contrary to the mission of the fund, investors should be worried regardless of the performance of the company. “It could pave the way for more compromises in the portfolio, leaving the investment thesis in disarray,” he added. With new, more tech-based businesses lining up for public offerings, investors can keep an eye out for the action of mutual funds.


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