One Factor That May Cap Zomato’s Listing Premium

Zomato’s Rs 9,375-crore share sale garnered subscription for shares worth more than Rs 2.09 lakh crore by the time it closed on Friday. The portion earmarked for non-institutions, including high-net-worth investors, portfolio managers and alternate investment funds, was subscribed nearly 35 times.

Not bad, some would say. But appears muted given that it’s the first of the large Indian internet companies going public. Demand from non-institutions also pales when compared to how this category bid in the two successful IPOs preceding Zomato’s. Shares set aside for this cohort were subscribed more than 200 times in the offers by GR Infraprojects Ltd. and Clean Science and Technology Ltd. Tatva Chintan Pharma Chem Ltd. saw its IPO subscribed 182 times, while the non-institutional allocation was subscribed 517 times.

While institutions do not speculate and the retail category is not big enough to drive IPO pricing, the non-institutional category including wealthy investors, portfolio managers and other funds largely invest for listing-day gains. As a result, this group partly influences the performance on the first day of trading after an IPO.

And the listing price is influenced by:

• The lot size or the minimum number of shares an investor can buy in a single transaction.

• Cost of financing or interest on money borrowed to buy shares.

• The duration for which the money is borrowed.

• Subscription of the non-institutional portion.

• Market sentiment that determines the grey market premium over and above the cost of financing.

In case of Zomato, lenders like Bajaj Finance Ltd. that provide IPO financing offered money at 8.5% if the borrower provided a margin up to 5%, and the rate rose marginally if margin was lower, market participants who took financing told BloombergQuint on the condition of anonymity as they aren’t authorised to disclose details.

The premium in the grey market for Zomato hovered around Rs 15-17 apiece or 20-22% over the IPO price, two people aware of trading details said—they didn’t want to be identified as they aren’t authorised to disclose details. On Thursday, the premium was up at Rs 22-23 or 29-30%.

For GR Infraprojects and Clean Science, the buyers of shares in the grey market were willing to offer a premium of 68-70%, the people said. Both listed at a premium of around 100%.

That’s because the breakeven price for Zomato is lower.

Breakeven Price

According to BloombergQuint’s calculations, Zomato’s cost of financing for seven days at 8.5% interest and 34.8x subscription amounts to a breakeven price of Rs 80.1 apiece.

At Rs 4.1 per share of the upper end of price band, that’s 5.4% of the issue price.

The breakeven price for GR Infraprojects, based on 8.5% interest and seven-day financing period at 238-times non-institutional subscription, was Rs 1,145.5 apiece—or 36.9% of the IPO price. It listed at Rs 1,716.30 per share.

For Clean Science, based on 8.5% and 7-day financing period at 211.12-times subscription by non-institutions, the breakeven was Rs 1,194.3 apiece. Or about 32.7% of the IPO price. It listed at Rs 1,750 per share.

What that means is non-institutional investors will make profit on even low listing-day premium. So there may be less impetus to bid up the debut price.