A tale of two listed start-ups: Zomato and Nykaa

July 23, 2021. It was just another trading session for the Indian bourses, but for a large section of market participants and also entrepreneurs it was a day they were waiting for long. The day's proceedings were keenly followed since it would potentially decide whether start-ups with huge valuations in the private market would tap the more transparent public markets.

Home-grown online food delivery major Zomato made its debut on the bourses on July 23. The issue price was Rs 76, but it opened at Rs 115 and touched an intra-day high of Rs 138 before closing at Rs 125.85 - a premium of nearly 66 per cent to the issue price.

Cut to November 10, 2021. FSN E-commerce Ventures, the parent company of beauty and fashion retailor Nykaa, made its debut on the bourses and saw its shares nearly double on the first day to close at Rs 2,207 - its issue price was Rs 1,125.

To sum up, these two start-ups have listed on the Indian exchanges this year and both made a stupendous debut. But, that's just one side of the story.

In August, the benchmark Sensex gained nearly 9.5 per cent. Zomato shares gained less than one per cent. In September and October, Sensex was up 2.73 per cent and 0.31 per cent, respectively but Zomato again underperformed by gaining only 1.64 per cent in September and shedding 3.70 per cent in October.  

In the current month till date, however, Zomato has performed better than the benchmark. So, based on data, one can say that the strong and impressive debut can be followed by a long period of lull and narrow range-bound trading.  

Incidentally, the public issue of the fintech major Paytm, which closed for bidding on Wednesday, got subscribed just around two times, as per NSE data. To put things in context, the IPO of Nykaa and Zomato was subscribed 81.78 times and 38.25 times, respectively.

Many in the market, however, believe that one cannot compare Nykaa and Zomato as the former is profit making - a rarity in the start-up world - plus the founders have a much bigger skin in the game.  

Zomato's founder Deepinder Goyal owns less than five per cent in his company while in the case of Nykaa, founders have nearly 53 per cent stake.  

However, this has not stopped either of the companies commanding huge valuations as both are currently among the 60 biggest listed entities while racing ahead of many of the traditional and more profitable firms like Coal India, Godrej Consumers, ICICI Prudential Life Insurance and Britannia among others.

Deepak Ahuja, an active investor in the start-up space and a former banker, says that listed companies are under a constant scrutiny of public shareholders and any news development or earnings announcement will impact the share price and start-ups are no exception.

"Investors need to understand that the private and public markets are quite different and they should do proper due diligence and not just go by the hype. For example, Nykaa is profit making but Zomato is still burning cash though both have a dominant position in their respective sectors. Both are now listed so any news or results announcement will impact the price. Investors should have patience and look at aspects like business model and scalability to decide whether a start-up is worth investing," says Ahuja.

While the 30-share Sensex is currently trading 480 points lower, shares of Zomato are up nearly three per cent while Nykaa is down 0.73 per cent.  

Only time will tell whether these unicorns end up as the darlings of Dalal Street or end up in the list of high-profile entrants that only made investors wary of coming to the stock market.

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