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Why are Zerodha and ZOHO CEO’s arguments on listing mistaken?

Updated: Feb 15, 2022


A case of tail wagging the dog. You always have a choice between DMart and Reliance Power

Recently Nithin Kamath (CEO of Zerodha) has tweeted the reason to not IPO is because it burdens with unrealistic expectations and I quote “For a stock to do well, you have to outperform”. The quote was retweeted by Sridhar Vembu (CEO of ZOHO) and he quotes “I cannot run a public company with the kind of hyper-inflated valuations that are common today”.

Companies performance expectations – decide valuation. Stock price do not decide company expectations

The price of a stock is a function of the crowds’ expectations of the future potential of a company’s cash flows. These expectations, in the long run, are set out by the company in terms of guidance and explaining to investors what are the opportunities and risks that lie ahead.

However, on a given day, as Warren Buffet puts it, Mr. Market may behave like a Drunken Psycho – very enthused on a few days and very depressed on others.

IRCTC stock moved up 3x in a year does not mean Indian government should decide to launch more trains and sell tickets to justify the stock price. It is very very foolish to think that investor expectations and stock prices should anyway influence promoters/CEOs to change how they run a company.

IPO problem – Valuation greed

Nithin Kamath on 7th April had tweeted a set unconventional reason of why he was not considering an IPO on April 7th. One of the key reasons was that there was no need to raise money. "We don’t want to raise money because somebody is ready to give it to you. Zerodha was profitable and debt-free." This was very well applauded (as it should be for lack of needing money) and somebody was needed to point out the excesses of investments bankers and corporates.

Having been part of IPO mandates – one of the portions of every deck or presentation is about the timing of the IPO to maximize valuation from a greed perspective. Investment Bankers spend time explaining to the corporates why the markets are hot and especially for their sector and this is why the company needs to go for IPO now. Also, after a very successful IPO in a sector – investment bankers reach out to other private companies in the sector explaining to them (feeding into frenzy) – why the sector is hot and the timing is right. Investment Bankers get into a rat race of quoting the highest possible IPO price to win the mandate – building the bluest of blue case scenarios.

We had reached out to a TATA company for an IPO and said the market is currently interested in your sector and valuations high. The TATA management was quick to retort – “Do you think we list a TATA company because the market is “HOT”.

Greed of wealth sounds bad – Pursuit of wealth sounds good

The desire to earn fame and wealth and to create value drives entrepreneurs. Azim Premji has been in pursuit of wealth since very early and built a mammoth enterprise and is proud to be miserly. Despite that today he is one of the biggest philanthrope apart from creating huge value for investors, employees, and customers. Zerodha and ZOHO can continue their pursuit of creating wealth and staying private – but don’t need to discredit other businessmen who are trying the same via the listing. It’s no businessman/promoters’ fault if the company stock is overvalued – until and unless he is misguiding.

Nykaa or Zomato – outperform market and not investor expectations

Nykaa's Falguni Nayar would have been heavily wrong if someone in 2012 asked her about projections for Nykaa for 3 years and maybe wrong today also. New companies like Zomato regularly change course – like exiting Fitso and global presence. There is no compulsion to make 2/5/10 year projections – nobody is forcing you. Companies like Zomato also don’t conduct quarterly investor concalls – maybe to stay away from the quarter to quarter focus.

One of India’s biggest private media conglomerates – when I pitched them for IPO (part of my earlier job) clearly said to me – We don’t want a 25-year-old analyst questioning our chairman on Quarterly profits and targets. We don’t live quarter to quarter.

Stock markets don’t live Quarter to Quarter either

It is often blamed by businessmen/corporates that analysts and investors are short-sighted. Well, I can speak for the investor community at large – Don’t be fooled by our questions. Our interest is in making money and enough literature/books have been written about the compounding of wealth and benefits of long-term investment. Warren Buffet and RK Damani have exhibited it. We investors have been alive and kicking as long as corporates have been and we know how to make money. CEOs should stop questioning the intent of stock markets and focus on their business. In the similar vein, Investors should stop giving targets to CEOs and focus on the returns.

Promoters can always list at what they think is right valuation

DMart opened at 2x of the IPO price and is currently trading at 15x. Does that mean ace investor RK Damani was incapable of pricing his business right? It only means, he priced at what he thought was right. The same goes out for Nykaa, IRCTC, or maybe GR INFRA. Nithin Kamath can list by pricing Zerodha like DMart or Reliance Power. That’s his choice, but don’t blame current valuations and expectations be a reason to not list. Let it be the lack of needing money.


About the Author

I have spent the last 15 years (2004-2019) as a Sell-side Equity Analyst covering sectors like Media, Telecom, and Consumer MidCaps. I was at SBI capital markets from 2004-2007 and at ICICI Securities from 2007-2019.

I was rated by Institutional Investor as the best analyst for Media – India for 2014-16. I am a Recreational Poker player and was the winner of the First ever WPT Indian Main event. I have dabbled a bit in Theatre. I wish I can watch more movies and read more books. Hope to travel around the globe.



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