Mutual Fund Schemes Investing in Beaten Down Stocks Like Zomato and Paytm

• "The four most dangerous words in investing are: this time it's different". - Sir John Templeton

Asset price bubbles are not new.

Dutch Tulip Bubble was perhaps one of the first big asset price bubbles in recorded history. During the 1630s, the cost of rarest tulip bulbs went through the roof in Netherlands. Having tulip trees in the garden was considered to be a status symbol. The bubble burst in 1637.

Dotcom bubble and the US housing market bubble were the big bubbles that had excruciating aftereffects in the past two decades.

Speaking about present times, cryptocurrencies and new-age tech platform companies have seen a similar enigma. It's still highly debatable whether these are bubbles or great investments of the future.

Some investors see an immense value in new-age tech platform companies (also known as new-age digital companies) who serve their customers mainly using technology. There's been an astronomical rise in the high-tech start-up valuations since the coronavirus pandemic began in early 2020.

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Take for example Zomato Ltd. The upbeat markets and the early success of Zomato boosted its confidence. The promoters demanded jaw-dropping valuations at the time of listing, despite a clear path to profitability was nowhere in sight.

Zomato, India's most ballyhooed food-tech start-up, had a blockbuster listing in July 2021. It made listing gains of 51%. It triggered a buying frenzy on Dalal Street. In just a few months, Zomato doubled from its offer price.

But the rally was short-lived. Everything started going wrong towards the end of the year 2021. The stock crashed below its offer price in March 2022. It's a picture of gloom for those who invested in Zomato at lofty valuations.

The case with One 97 Communications or Paytm was no different. Its founder, Mr. Vishal Shekhar Sharma demanded an absurd valuation of around Rs 1.4 lakh crore at the time of IPO.

The result? The stock closed 27% lower than the issue price (of Rs 2,150 per share) on the listing day (18 November 2021).

India's so-called most clearly loved app, was clearly not loved by its investors. Today, One 97 Communications or Paytm has crashed around 70% from its offer price in just 5 months since its listing.

The Bombay Stock Exchange even sought clarification from Paytm for the scary slide in its stock price. The CEO and founder, Mr. Vishal Shekhar Sharma, a few days later said, his stock grants will vest only after shares cross IPO price.

But the fact is there is uncertainty about the company's profitability and has destroyed investors' wealth.

These are just a couple of examples. A few other companies, too, have destroyed investors' wealth (refer to Table 1). These are clearly the beaten-down stocks. The game of greed and fear has turned ugly!

Table 1:Performance of Newly Listed New-Age Start-ups

Company	Listing Date	Offer Price (Rs)	Listing Price (Rs)	Current Price (Rs)	Profit/Loss since the Offer Price (%)
One97 Communications	18-Nov-21	2,150	1,955	640	-70%
CarTrade Tech	20-Aug-21	1,618	1,600	630	-61%
Fino Payments Bank	12-Nov-21	577	548	305	-47%
PB Fintech	15-Nov-21	980	1,150	781	-20%
Zomato	23-Jul-21	76	115	80	6%
FSN E-Commerce Ventures Ltd.	10-Nov-21	1,125	2,001	1,795	60%

(Source: Stock exchange data, PersonalFN Research)

Except for FSN E-Commerce or Nykaa, most other new-age platform companies are trading at deep discounts against their offer prices.

The interesting part is that even some of the seasoned investors such as mutual funds seem to have bought lofty stories of promoters and got carried away by their narratives (refer to Table 2).

When it comes to investing in new-age tech platform or e-commerce companies (many of which are start-ups), mutual funds perhaps have faced FOMO (Fear Of Missing Out) syndrome.

Table 2: Exposure of Mutual Funds to New-Age Tech Stocks

Company	Marketcap (Rs cr)	MF Holdings (Rs cr)	MF Holdings (%)
FSN E-Commerce	85,104	1,702	2.0
One97 Communications	41,482	440	1.06
PB Fintech	35,083	1,067	3.04
Zomato	11,385	442	3.88
CarTrade Tech	2,939	60	2.05
Fino Payments Bank	2,541	191	7.53

Data as of Q4FY22 wherever available else as on Q3FY22
(Source: BSE, PersonalFN Research)

The largest exposure of the mutual fund industry is to FSN E-Commerce or Nykaa followed by PB Fintech (who owns Policybazaar and Paisabazaar platforms), in absolute terms. CarTrade Tech is the least popular stock among fund managers.

PersonalFN analysed the portfolios of all diversified equity schemes and found that 52 schemes had invested in new-age tech stocks as of 31 March 2022. Their average single-stock allocation was 0.7%. The minimum and maximum exposures were 0.1% and 2.8%, respectively.

Table 3: 5 Fund Houses with the Highest Exposure to New-Age Tech Stocks

Scheme Name	Exposure (Rs crore)
	Nov-21	Mar-22
UTI Mutual Fund	435	493
Motilal Oswal Mutual Fund	617	468
Mirae Asset India Mutual Fund	861	346
Aditya Birla Sun Life Mutual Fund	751	324
Franklin Templeton India Mutual Fund	252	309

Data as of 31 March 2022
(Source: ACE MF, PersonalFN Research)

In November 2021, diversified mutual funds had a collective exposure of Rs 6,536 cr to 6 new-age tech start-up companies - Zomato, Paytm, PB Fintech, Fino Payments Bank, Nykaa, and CarTrade Tech.

This exposure reduced to Rs 3,260 cr in March 2022, possibly due to the performance of these stocks.

Out of 44 fund houses doing business in India, 21 held investments in new-age tech platform or e-commerce companies as of 31 March 2022.

Responsible fund houses such as Parag Parikh Mutual Fund and Quantum Mutual Fund stayed away from the start-up mania of Dalal Street.

UTI Mutual Fund held the highest exposure to new-age tech platform companies. UTI Value Opportunities Fund's exposure to Zomato, albeit low at 0.3% of the portfolio, raises serious doubts about its idea of value investing.

On the other hand, Motilal Oswal Mutual Fund's high conviction in newly listed platform companies stems from the group's philosophy.

The chairman of the fund house has publicly expressed his conviction in new-age digital companies or tech platform e-commerce companies. He expects them to feature amongst the biggest wealth creators over the next 10 years.

Table 4: 5 Fund Houses that Hiked Exposure to New-Age Tech Stocks

Scheme Name	Exposure (Rs crore)
	Nov-21	Mar-22
Invesco India Mutual Fund	125	282
ICICI Prudential Mutual Fund	70	140
UTI Mutual Fund	435	493
Franklin Templeton India Mutual Fund	252	309
HSBC Mutual Fund	15	25

Data as of 31 March 2022
(Source: ACE MF, PersonalFN Research)

Fund houses such as Invesco Mutual Fund and ICICI Prudential Mutual Fund have increased their exposure to Nykaa and PB Fintech during the recent market correction. Franklin Templeton Mutual Fund added PB Fintech and Zomato to various schemes.

While some have increased their bets as the markets correct and stock prices crashed, some other fund houses have been wise enough to reduce their exposure to some of the new-age tech stocks (refer to Table 5).

Table 5: 5 Fund Houses that Lowered their Exposure to New-Age Tech Stocks

Scheme Name	Exposure (Rs crore)
	Nov-21	Mar-22
Axis Mutual Fund	877	150
SBI Mutual Fund	767	93
Mirae Asset India Mutual Fund	861	346
Aditya Birla Sun Life Mutual Fund	751	324
Canara Robeco Mutual Fund	393	0

Data as of 31 March 2022
(Source: ACE MF, PersonalFN Research)

It's noteworthy that the fall in mutual fund exposure is perhaps because of the massive price erosions in these stocks. Some mutual funds seem to have pressed the panic button and exited over the last 2 months.

Now let's see which diversified equity schemes have the highest exposure to beaten-down new-age tech stocks.

Scheme #1: Motilal Oswal Flexi Cap Fund

Launched on 28 April 2014, Motilal Oswal Flexi Cap Fund aims to achieve long term capital appreciation by primarily investing in a maximum of 35 equity and equity-related instruments across sectors and market-capitalisation levels.

As of 31 March 2022, the weightage of equity assets in its portfolio is 98.6% with a total of 65 stocks. Whereas the remaining are the cash and equivalent assets to manage the liquidity needs.

Table 6: Top New-Age Beaten Down Tech Stock Holdings of Motilal Oswal Flexi Cap Fund

Stocks	% of Assets
Zomato Ltd.	2.6
FSN E-Commerce Ventures Ltd.	1.1
Fino Payments Bank Ltd.	0.3

Data as of 31 March 2022
(Source: ACE MF, PersonalFN Research)

Over the last three months, the fund has added Nykaa to its portfolio, whereas its holdings in Zomato and Fino Payments Bank has remained unchanged.

Scheme #2: Motilal Oswal Focused 25 Fund

Launched on 13 May 2013, Motilal Oswal Focused 25 Fund aims to achieve long term capital appreciation by investing in up to 25 companies with long term sustainable competitive advantage and growth potential.

Table 7: Top New-Age Beaten Down Tech Stock Holdings of Motilal Oswal Focused 25 Fund

Stocks	% of Assets
Zomato Ltd.	2.4
FSN E-Commerce Ventures Ltd.	1.0

Data as of 31 March 2022
(Source: ACE MF, PersonalFN Research)

As of 31 March 2022, Motilal Oswal Focused 25 Fund held 27 stocks in its equity portfolio with Zomato and FSN E-Commerce Ventures Ltd. or Nykaa. Investment of the fund in equity assets accounted for 98.4% of the portfolio, and the remaining 1.6% of its portfolio is in cash and equivalent assets.

Scheme #3: Invesco India Flexi Cap Fund

Launched on 14 February 2022, Invesco India Flexi Cap Fund aims to generate capital appreciation by dynamically investing in a mix of equity and equity-related instruments across market capitalisation i.e. large, mid, and smallcap stocks.

Table 8: Top New-Age Beaten Down Tech Stock Holdings of Invesco India Flexi Cap Fund

Stocks	% of Assets
FSN E-Commerce Ventures Ltd.	1.6
PB Fintech Ltd.	1.1

Data as of 31 March 2022
(Source: ACE MF, PersonalFN Research)

As of 31 March 2022, the fund held 85.7% of its overall portfolio in equities with a total stock count of the portfolio at 55. These included FSN E-Commerce Ventures Ltd and PB Fintech.

Cash and equivalent assets accounted for the remaining 14.3% of the overall portfolio. The fund has been accumulating Nykaa and PB Fintech over the past two months.

Outlook for Beaten Down Digital Stocks in India

Except for FSN E-Commerce Ventures Ltd, most other new-age digital companies do not have a track record of profitable growth. Many of them are still in a 'cash-burning phase'. They are yet to breakeven even at the operating EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) level.

What is keeping them on, is the backing of Private Equity (PE) and Venture Capital (VC) firms. However, it remains to be seen whether this equation changes with rising interest rates and inflation in the US and even elsewhere in the world.

In other words, betting on the beaten-down tech stocks is extremely risky. You may not make wealth as anticipated.

Even if the mutual fund scheme you have invested in is taking high exposure to beaten-down tech stocks, be careful. Be cautious.

Happy Investing!

Disclaimer: This article has been authored by PersonalFN exclusively for Equitymaster.com. PersonalFN is a Mumbai-based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinions on investing.