Avoid aggressive buys in richly-valued companies like Zomato: Analysts – The Economic Times

Clipped from: https://economictimes.indiatimes.com/markets/stocks/news/avoid-aggressive-buys-in-richly-valued-co/articleshow/84691807.cmsSynopsis

While the stock could extend the opening day gains in the coming days, thanks to appetite from institutional investors, higher valuations make it vulnerable to a sharp sell-off, they said.

Mumbai: Investors must hold back from making aggressive purchases in shares ofZomatoNSE 65.79 % as the company is richly valued after its strong listing on Friday, said analysts. While the stock could extend the opening day gains in the coming days, thanks to appetite from institutional investors, higher valuations make it vulnerable to a sharp sell-off, they said.

On Friday, Zomato listed at ₹115 on the BSE, about 51% over the IPO price of ₹76. After rising as much as 81% in the session to a high of ₹138, the stock ended at ₹125.85, up 65.6% over the issue price. While the IPO price of ₹76 was perceived to be rich, the first-day run up has made the stock even more expensive, said analysts.

“Fundamentally, the stock was overvalued even at the IPO price. At 60% higher, the valuations are quite absurd and it is a reflection of what’s happening globally. Globally also digital companies are getting listed and getting high valuation. This is not sustainable,” said independent market expert Sandip Sabharwal. “Wherever the stock tops out in the next few days that could remain a top for a long time,” said Sabharwal.

Analysts said Zomato is popular among investors in the absence of similar listed options in the domestic new-age business space. The current momentum in the stock price could sustain for the time being, they said.

Geetanjali Kedia, research analyst at SPTulsian.com, said one should exit the stock if they have been allotted in the IPO. “The whole IPO has been structured around first unicorn listing but the hyper growth will taper at some point. Few quarters down the line, investors will question profitability; and when this happens, the frenzy will fizzle. One should exit they have been allotted shares in the IPO, as they have anyways made sizeable gains,” said Kedia.

Experts said Zomato has gained market share in the last three to four years and has now become a leader in gross order value. The company is in a duopoly market and could gain further market share in the online food delivery space which is at a nascent stage in India. While these factors may work in favour of Zomato, which is still reporting losses, but one should wait for the exuberance to settle down before looking to buy the stock. “As the listing is ahead of expectations, it is time for investors to be cautious,” said Arun Kejriwal, founder, Mumbai-based investment advisory Kris Research.

Some in the market are asking clients with a longer outlook to buy shares in smaller quantities systematically, rather than going in all out now.

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