Edition | December 20-26, 2021.

Zomato’s entry into the indices of global index aggregator MSCI in November has come at an opportune time for some of India’s biggest active fund managers.

Shares of the company had rallied more than 15 percent last month after it was included on the MSCI indices, which triggered buying from several foreign exchange-traded funds. According to some estimates, global passive funds purchased more than $160 million worth of Zomato shares in November.

The inclusion provided a perfect opportunity for large mutual funds in India to trim or fully exit their holdings in the food technology giant, given that the stock had been stuck in a rut throughout September and October after a roller-coaster ride in August. Zomato was listed on July 23.

Domestic mutual funds were net sellers in the stock to the tune of Rs 630 crore in November, led by MF giants SBI Mutual Fund and ICICI Prudential Mutual Fund, data by Edelweiss Securities showed. ICICI Prudential used the rally to fully exit its remaining holding in the company, some 9.9 million shares, data compiled by East India Securities showed. The mutual fund had bought more than 13 million shares of the company through the initial public offering.

SBI Mutual Fund, the largest by assets managed, sold more than half of its holding in the stock last month. The sale by SBI MF was the first after it bought more than 42 million shares in the IPO. These developments reflect the bearishness among mutual fund managers for a company whose valuations have become a hot topic in the Indian capital market.

Aditya Birla Sun Life Mutual Fund, which was a buyer of the counter in October after the selling pressure the stock had seen in August and September, also turned a seller during November. The fourth largest mutual fund by total assets sold 95,342 shares of the company. Curiously, Kotak Mutual Fund has continued to buy shares of the food technology major, suggesting that it sees room for further upside in the stock. Kotak Mutual Fund bought 4.1 million shares in October in addition to 4.2 million shares bought in October.

Despite the bearishness among mutual fund managers, the analyst community has remained gung-ho on the online food aggregator. They expect industry-leading revenue growth and investments in other startups to justify the stock’s rich valuations. Zomato is valued at more than 24 times its one-year forward enterprise value-to-sales, making it one of the most expensive food delivery stocks in the world.

“We expect Zomato to achieve a large scale with a dominant share of 50%-plus, without any major expansion in take-rates,” says brokerage firm Edelweiss Securities, which has initiated coverage on the stock with a Hold rating. “Value creation, we anticipate, would stem from expansion to adjacencies, a la typical high-engagement platforms.”

The more than 6 percent decline in the scrip in December suggests that in the absence of FPI buying power, sellers will continue to overwhelm the counter as the stock remains an expensive proposition and retail sentiment has soured after Paytm IPO failed expectations, say analysts.

The company’s more than 100 percent top-line growth in the September quarter and strong food delivery sales are still not enough to convince investors to indulge in a delicacy that promises a great future