Can Zomato IPO be responsible for the Market Crash?

 

12^th July 2021

Can Zomato IPO be responsible for the Market Crash?

Dear Fellow Travelers,

Namaste! All our post on the USA has been liked by our readers. The last one on Pentagon was super hit. Thanks a ton. There is a new normal in the USA market nowadays. Loss-making companies are raising money from the market and they are making a new high or making multiple times money for the investors.

Loss Making company IPO - The NEW NORMAL: -

If you think a rush by companies to sell their shares is a bad omen for the market, imagine a scenario where most of the sales come from firms that don’t make money.

It’s happening now. Since the end of March, almost 100 unprofitable U.S. companies, including GameStop Corp. and AMC Entertainment Holdings Inc., have raised money through secondary offerings, twice as many as coming from profitable firms, according to data compiled by Bloomberg.

Granted, troubled companies are tapping into buoyant demand during a 16-month rally to beef up their balance sheets. And is further evidence that the capital market functions as smoothly as it’s supposed to. Yet some warn that the flood of shares coming from money losers is becoming extreme.

In the past 12 months, almost 750 money-losing firms have sold shares in the secondary market, exceeding those that make profits by the biggest margin since at least 1982, data compiled by Sundial Capital Research show.

“That perhaps points to companies getting greedy,” said Mike Bailey, director of research at FBB Capital Partners. “Anytime you have a bunch of selling by desperate companies, that could be a signal we’re closer to a top than a cyclical bottom.”

The year 2000 episode showed what might be at stake. Back then, a similarly ebullient market lured profitless companies to offer shares. Once supply overwhelmed demand, the party turned into a scare. Stocks with no fundamental support sold off and the carnage spread to the rest of the market.

“There can be too much money chasing too little good deals,” said Jeanette Garretty, chief economist at Robertson Stephens Wealth Management. “When the good deals don’t need that money, they start looking for less great deals, and then down the road this is what can lead people to get their fingers burned.”

How ZOMATO is placed?

Its India’s fist loss-making company coming with an IPO. The size is Rs.9300 Crs. Last week two issues closed and they got bids worth Rs.2.3 lakh crores. They were subscribed by 90-100 times. Say Zomato is also subscribed by 100 times – it will need 9 lakh crores of bids. This is a huge amount for the market. Say it is oversubscribed by 200 times then the amount would be 18 lakh crores.

So, liquidity will get diverted towards IPO. This can be a trigger for the crash in the market.

What had happened in 2006 and 2008?

Reliance Petroleum issues were the biggest issue in that year in May or June. It was listed and the market hit the lower circuit.  

Reliance Power was the biggest issue in January 2008. It was listed on 17/1/2008 and the market hit the lower circuit.

Big issues suck the bigger liquidity from the market. To make big application normally, selling is done in the secondary market so that money can be diverted into IPO.

As such, the market is overheated and running way ahead of the fundamentals. It is due for a correction at any time. I would not be surprised if Zomato IPO becomes responsible for the market crash.

What is my understanding?

Thanks to over production and supply – the USA had launched the concept of Enjoy Now and Pay Later. People were motivated to take various loans – personal – travel – car – furniture and housing loans to buy the products. That way they created a teji in the last 40 years. In the last 10 years, we have seen most of the top companies who took big loans have been forced to close down their business. Banks have lost tons of money.

Today, the USA and the world is full of Liquidity. They are asking all to invest in Loss-making companies. All they are wishing that someday the companies will start earning profit. It has happened with very few companies since 1999. They are considering exceptions as a rule.

My personal understanding is that you can’t cheat the Market and Nature in the long run. In the short run also, you are cheating yourself only.

Wish you all a happy week ahead.

Follow me on Twitter @hiteshmparikh Or on Whatsapp - +91-9869425399.

 

Live With Passion…Invest With Passion.

 

Hitesh Parikh.