Mutual funds’ enthusiastic participation in last week’s Zomato IPO has raised many eyebrows. The anchor book portion of the public issue saw subscription from 19 mutual fund companies across 74 schemes with varying mandates. Questions are being raised about the clamour to buy shares of a business which is yet to make profits but commands a hefty price. It is perceived that asset managers have turned a blind eye to yardsticks like earnings visibility, cash flows and return on capital-among other metrics on which they claim to put high emphasis.
Feroze Azeez, Deputy CEO, Anand Rathi Wealth Management, feels the size of the bets is too low for investors to bother. “As long as the allotment is granularly distributed and does not form a lumpy chunk of the asset base of any fund, investors should not be unduly concerned,” Azeez says. The funds’ total allotment at the IPO stage amounts to nearly Rs 1,400 crore, which hardly creates a dent on their total asset base.
Five biggest mutual fund investors in the Zomato IPO
But their allocation to the food delivery company is only a fraction of their asset base
|Scheme name||Amount allotted (Rs crore)||Fund corpus (Rs crore)||Amount allotted as % of corpus|
|Kotak Flexi Cap||91.1||36,355||0.25%|
|Franklin India Flexi Cap||82.0||9,488||0.86%|
|Motilal Oswal Flexi Cap||66.3||11,884||0.56%|
|Mirae Asset Large Cap||60.0||26,747||0.22%|
Fund corpus as on 30 June
Some feel fund managers simply cannot ignore a high-profile IPO like Zomato, given their constraints. “At post-IPO market cap of Rs 65,000 crore, Zomato will be eventually moving into the large cap indices. Given that most active funds are index conscious, nearly all large cap and flexi cap funds will need to have it in their portfolio,” observes Vikas Gupta, Chief Investment Strategist, OmniScience Capital. Large cap and flexi cap funds were among the biggest takers for the Zomato IPO, apart from some funds of thematic bent such as technology, consumption and special situations.
However, what has left many scratching their heads is Zomato shares being lapped up by conservative funds like value, dividend yield and hybrid categories. Some argue that traditional valuation metrics cannot be used for internet or tech-based companies as initial cash burn and investments tend to be higher. But with no immediate clarity on how to properly value these companies, putting them in the value zone is a stretch, feel experts. “Zomato finding space in a value fund goes against the basic tenets of this philosophy,” insists Azeez. With the company having never made a profit till date, and path to profitability remaining unclear, it is also perplexing to see its shares being parked in a dividend yield fund.
“Sebi allows funds some leeway to deviate, so they are not going against the rules. But there is no doubt that there is a disconnect with the risk profile,” argues Gupta. “If the choice of new listing goes against the fund mandate, investors should be concerned regardless of how the company’s performance pans out,” asserts Arun Kumar, Head- Research, FundsIndia. “It may pave the way for more compromises in the portfolio, sending the investment thesis for a toss,” he adds. With more tech-based, new-age businesses lining up public offers, investors may keep an eye out on mutual funds’ actions.