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Zerodha CEO Nithin Kamath’s strategy to deal with IPOs of Zomato, Paytm – Economic Times

A retail investor may allocates 10% of the portfolio in high-growth companies like Zomato and Paytm, says Nithin Kamath, Founder & CEO, Zerodha. Edited excerpts from a chat with ET Now.

What do you think about Zomato IPO?
The retail allocation was just 10%. It was mainly institutional. There is institutional demand for hyper growth companies. Whether it is Robinhood or Tesla, they are not valued on the traditional matrix of price-to-earnings ratio. Most businesses are valued based on growth.

Indian institutions have missed out on the entire Indian startup ecosystem space because outside money from VCs and PEs benefitted the most. Looking at the oversubscription numbers, it is evident that there is a lot of appetite for hypergrowth companies. I know it comes with the risk of being more than fairly valued but as long as they can continue growing fast, they will continue to see a lot of demand from institutional investors and may be retail investors as well.

If you look at the institution part, it almost felt like an international listing and not an Indian listing because the venue is India, the demand is institutional. I do not know if all start-ups are going to see similar kind of demand from institutions like Zomato did.

The likes of Paytm, PolicyBazaar, Delhivery and Nykaa are going hit Dalal Street soon. How should a retail investor approach such IPOs?
About 5-10% of your portfolio can be allocated to high growth businesses because they come with a lot of risk and as soon as growth (projections) are not met, the stocks can see large amounts of haircut.

A retail investor may allocates 10% of the portfolio in such companies and pick up the ones he understands well. It is very tough to say which of these IPOs or stocks you should be investing because its based on future growth.

A lot of that growth is not in the control of the company. We all live in a world where things can go wrong very easily. So the right way to approach this for any retail investor is portfolio allocation. You need to have some exposure to high growth stocks because they have been giving great returns. But keep the portfolio exposure small.

There have been a lot of articles saying that one good way to spot a winner is to go for a monopoly or a duopoly. Would you agree with that argument?
In every tech business, monopolies and duopolies come with a valuation premium. In the business of money, being a monopoly or a duopoly is preferable but after listing on the exchange they come with a valuation premium. All their previous investors would have already given that premium. It improves the odds of that investment doing well. But regulators do not like monopolies and duopolies. So in such a structure, you tend to have a ratio of regulatory risk.

Any interesting trend you noticed during Zomato IPO subscription?
We cater to the younger population and so the average age of a customer is around 30 years. A lot of times accounts of women are managed by their fathers, brothers or husbands. So if you look at the data, you cannot figure out whether it is really a woman who is doing the transaction.