According to a report from JM Financial Institutional Securities, Zomato’s stock is expected to experience volatility in the short term due to market speculation regarding potential divestments by certain pre-IPO shareholders (including venture capitalists, private equity firms, and Chinese investors) of the company. This speculation also extends to former shareholders of Blinkit who had obtained their shares through a share swap arrangement.
“While we cannot accurately predict when (if at all) these shareholders would want to exit, we note that several of them are already sitting on sizeable gains, albeit a large chunk of it is unrealised. A few cues from past actions of these investors suggest that at least some of them would be eager to book profits post the recent run-up in the stock”, the report said.
Consequently, a significant portion of Zomato’s shares might become accessible for trading in the coming period. To provide context, the collective value of Zomato’s stock held by these investors, based on the current market price, amounts to INR 180 billion. Even if we were to consider that only half of the stake held by venture capitalists, private equity firms, and Chinese investors would be eligible for trading, the potential near-term capital outflows could approach the size of Zomato’s entire initial public offering (IPO), which was INR 93.75 billion, as indicated in the report.
“We strongly suggest that long-term investors use these liquidity events to build a sizable position in Zomato as it not only offers a strong play on India’s online food services market but is also, post the Blinkit acquisition, shaping up into a formidable diversified play on online retail”, it said.
Starting from August 28, shares held by former Blinkit investors will become eligible for trading. In the previous year, as part of the merger and acquisition, Zomato had issued new equity shares to the selling shareholders of Blinkit, valuing each share at approximately INR 70.76. Following this transaction, Zomato had successfully negotiated a 12-month lock-in period for these shares, surpassing the mandatory statutory lock-in period of 6 months. According to information sourced from BSE filings and the company’s official disclosures, these shares are anticipated to gain trading eligibility on August 28, as highlighted in the report.
The majority of these shares are under the ownership of three prominent venture capital investors: SoftBank, Tiger Global, and Sequoia. It’s important to highlight that only half of the shares linked to the Blinkit founder’s holdings will be open for trading within the upcoming days. The remaining 50 percent will remain subject to a lock-in period for an additional 12 months, as detailed in the report.
Numerous pre-IPO and former Blinkit investors are currently holding significant unrealized profits. Evaluating the acquisition costs of shares held by these Zomato pre-IPO and ex-Blinkit shareholders reveals that they are currently in possession of considerable gains from their investments. Nonetheless, a substantial portion of these gains remains unrealized at this point in time.
Considering the magnitude of these profits and drawing from the historical behaviors of these venture capital, private equity, and Chinese shareholders in relation to recently listed internet companies, it is reasonable to suggest that a considerable portion of Zomato’s stock might become accessible for trading in substantial quantities in the foreseeable future, as highlighted in the report.