Why Zomato's pre-public offer investors are rushing to the exit door

Though stock has crashed 65% from peak, most pre-IPO investors are in-the-money even at beaten-down valuations

Within two weeks of the one-year lock-in on Zomato’s pre-initial public offering (IPO) shareholding ending on July 25, three marquee investors in the food delivery major have sold their stakes in the open market.

This comes despite many initial investors netting gains, though the stock is currently trading at Rs 58 apiece, 65 per cent below its lifetime high of Rs 169 and about 25 per cent below its IPO price of Rs 76. And even as Zomato posted better-than-expected numbers for the quarter ended June and its management indicated that the food delivery business could turn profitable by the end of this financial year driven by cost efficiencies.

Investor sales

On July 26, venture capital (VC) firm Moore Strategic Ventures sold 0.54 per cent stake at Rs 44 apiece to mop up Rs 187 crore. Ride-hailing firm Uber on Wednesday divested its entire 7.78 per cent stake at Rs 50.44 apiece for a total of Rs 3,088 crore ($390 million). Meanwhile, Tiger Global’s Singapore-based Internet Fund VI has parted with nearly half of its stake in the company. Between July 25 and August 2, it sold 184.5 million shares, about 2.34 per cent stake, in the open market when Zomato shares moved in the range of Rs 41 and Rs 55.

On July 25, the day the one-year lock-in ended, Zomato’s stock tanked over than 11 per cent and another 12.5 per cent the next day as it hit an all-time closing low of Rs 41.65. Since then, it has rebounded about 40 per cent.

But what explains VC and private equity investors’ rush to the exit door.

Handsome gains

An analysis done by Clarence Chu, insight provider at Aequitas Research, who publishes on Smartkarma, shows most of these investors were sitting on handsome gains even at Zomato’s beaten-down levels.

For instance, the implied acquisition cost for Uber works out to Rs 26.9 per share. For Moore, it is even less at Rs 17.7 apiece.

“Note that with the exception of round K of Zomato’s preference share round, the other pre-IPO investors are still well in the money,” said Chu.

Series K, the last round of fundraise before Zomato’s IPO, took place in February 2021, when Kora and Fidelity invested about $115 million and $55 million, respectively. Their cost per share works out to Rs 58—close to the current market rate.

The series G and H investors are sitting on 3x gains even at current valuations, which are sharply off the peak. This could tempt many of them to sell as most PE and VC investors have a fixed investment cycle.

Zomato was India’s first major start-up to list on the bourses. The company doesn’t have any “promoters”. Its founder’s stake also is classified as public shareholding.

Chu notes that with the exception of Zomato’s founders, who hold just 4.7 per cent stake in the firm, most others are financial investors, who could “look to monetise their respective stakes sooner or later”.

“Reported earnings could be a catalyst for the firm’s share price over the next few trading sessions, however, with a number of financial investors which have yet come to markets to sell down their respective stakes, they remain an overhang on share price were they to trim/sell down their stakes opportunistically as well,” he added.