Experts question the rationale of some MF schemes investing in Zomato IPO

Market observers have flagged concerns over investments by certain categories of mutual fund schemes in Zomato's initial public offering (IPO).

Nineteen MFs through a total of 74 schemes -- that include a mix of 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.

"Historically, fund managers have always spoken about investing in companies with positive cash flows, profit margins, revenue growth, decent RoE or ROCE and a favourable debt to equity ratio. In that context, Zomato does not fit in, it's 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 & CEO, 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 a fund that follows a value investing strategy and seeks to invest in stocks that are deemed to be undervalued in price based on fundamental characteristics and based on metrics such as low price to earnings, price to book ratio, etc. 

"The mandates of mutual fund schemes have not been tightly defined, which 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. Investments 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 large cap 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, only DSP MF and Invesco MF have not participated in the anchor book, which included over 180 names. Sources said some domestic MFs are giving the issue a miss as it doesn’t meet their internal profitability criteria. 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 high-risk 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 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 little tricky for next few years. The valuation also appears expensive at 25x FY21 EV/Sales compared to average of 9.6x for global peers and 11.6x for Indian QSRs. Though, valuing such early stage businesses on plain vanilla financial matrix might not give the right picture and may look distorted. Investors with high risk appetite can subscribe for listing gains," said a recent note by Motilal Oswal.