InvestorQ : What is the reason for the stock of Zomato falling so sharply from a high of Rs169 to a price of Rs40 in less than a year?
prachi Patwardhan made post

What is the reason for the stock of Zomato falling so sharply from a high of Rs169 to a price of Rs40 in less than a year?

sara Kunju answered.
3 weeks ago

Zomato has been facing a tough time on the bourses. Post an impressive listing, the stock had touched a high of Rs169. However, since then the stock has cracked to the 40s and even gone as low as Rs40 after the 1 year lock in for the promoters and the early ended. The sale of 4.25 crore shares by Moore Capital only added to the fear in the market. The stock of Zomato basically moved across 3 distinct price phases.

· The first phase of selling came after the stock retracted from the Rs.169 levels down to its issue price level of Rs76. This fall wsa predicated on two factors viz. valuation concerns and the rapid growth of Swiggy. Most investors found the valuatins of Zomato too steep and profits too elusive. In addition, Zomato had moved from half of Zomato market value to nearly double of Zomato market value.

· The second bout of selling started the acquisition of Blinkit, a quick commerce company. The added burden of Blinkit losses was an overhang on the stock of Zomato since it had to be funded from capital. Also, there were concerns that this was more of a related party transaction and not transparent.

· The last phase of selling in Zomato came after 25th July, when the stock had just completed 1 year post listing on the bourses. This ended the 1-year lock-in applicable to early investors and it meant that every bounce in the stock would be met by heavy selling. That has kept the price under 50 since then.

But, why did the end of 1 year lock-in really spook the stock of Zomato? The stock fell by 14% on Monday and another 11.5% on Tuesday after which it stabilized and bounced back slightly higher. The price fall in the 2 days after the end of the lock-in was 22%. The reason for the panic selling was the the potential supply of tradeable Zomato shares in the market. Most early investors had invested at a fraction of the current price and for them it was still profitable even to exit at the price of 40-50 range. That was the concern.

Ironically, most of the brokerages have a buy call on Zomato. Take for example, JP Morgan, which had underlined a target price of Rs115 per share for Zomato. Interestingly, these very brokers are also quite bullish on the Zomato/Blinkit deal as they genuinely believe tht the deal would offer a unique convenience proposition. Apart from JP Morgan, even JM Financial has a target price of Rs115 per share on Zomato.

JM expects Zomato go gain from strong industry tailwinds for hyperlocal delivery services. For now, the pressure is quite high on the stock and showing no signs of relenting.