Zomato IPO opens for subscription today: Should you place an order?

It has already mobilised Rs 4,196.51 crore from 186 anchor investors on July 13, a day before the issue opening. And, the rest of the money will be raised in the next three days till July 16, via public offer.

The offer comprises a fresh issue of Rs 9,000 crore and an offer for sale of Rs 375 crore by Info Edge, the largest shareholder in the company. The net proceeds from fresh issue will be utilised towards funding organic and inorganic growth initiatives (Rs 6,750 crore); and general corporate purposes.

Also read - Zomato IPO opens: 10 key things to know about the issue and the company

"The IPO is valued at price-to-sales of 28.6-29.9 times FY21 revenues of Rs 1,993 crore, which is at a premium to other comparable global food delivery companies. While the Zomato IPO may seem expensive based on FY21 numbers, we believe that FY21 was an aberration as business was impacted significantly due to the first Covid wave and the ensuing lockdowns," said Jyoti Roy, DVP- Equity Strategist at Angel Broking.

Post a 23.5 percent de-growth in revenues in FY21 due to the Covid-19 pandemic, growth is expected to pick up sharply from FY22, Roy feels. Moreover, Zomato has been able to reduce its losses in FY21 despite a de-growth in topline.

Jyoti Roy expects losses to reduce further over the next couple of years due to rebound in growth and improving unit economics. "Given the strong delivery network, high barriers to entry, expected turnaround and significant growth opportunities in tier-II and tier-III cities, we believe that Zomato will command a premium to global peers and hence have a 'subscribe' recommendation on the IPO," he said.

Zomato reported consolidated loss for financial year ended March FY21 at Rs 816.43 crore compared to a loss of Rs 2,385.6 crore in FY20. Revenue from operations in the same period declined to Rs 1,993.78 crore from Rs 2,604.7 crore largely due to the impact of Covid-19.

Also read - Zomato IPO at premium to global peers, but it could be a wealth creator over a decade: Jyoti Roy of Angel Broking

Varun Singh and Kuber Chauhan of IDBI Capital also expect the company's losses to come down, going forward, driven by higher delivery charges (customers must pay for convenience) and reduction in competitive intensity (induced by consolidation).

"Valuation looks expensive from near-term point of view (6 times FY21 gross order value versus 1-3 times multiple for global competitors), but given the non-linear growth opportunity, we believe it's better to stay invested in such companies," said the brokerage which recommended subscribe.

Analysts largely feel the traditional valuations metrics like price-to-earnings will not be right measures to value such companies.

"A better way to value such high growth companies will be on Price to sales basis and compared with other global food delivery companies which are expected to witness similar growth trajectory over the next few years like DoorDash, Deliver Hero, etc," said Jyoti Roy.

As per Gaurav Garg of CapitalVia Global Research, customer acquisition costs, valuation, revenue, and competition from other players (in this example, Amazon and Swiggy) are a few aspects to consider for a tech-based firm.

Zomato is a technology first organization leveraging artificial intelligence, machine learning and deep data science to continuously drive innovations on its platform for its customers, delivery partners and restaurant partners. The company runs an integrated product, design, engineering and data science team without boundaries to boost collaboration and speed of output.

Zomato, having a strong brand name and recall across large and small Indian cities, has two core B2C offerings, Food delivery and Dining-out in addition to the B2B offering Hyperpure. Another important part of the business is Zomato Pro, which is the customer loyalty program and encompasses both food delivery and dining-out.

As of March 31, 2021, Zomato was present in 525 cities in India, with 3,89,932 active restaurant listings along with presence in 23 countries outside India.

Listing Gains

Few analysts are recommending the issue only for listing gains given its first mover advantage in the food delivery space, and tremendous enthusiasm among investors about this IPO.

"Zomato with first mover advantage is placed in a sweet spot as the online food delivery market is at the cusp of evolution. It enjoys couple of moats and with economics of scale started playing out, the losses have reduced substantially. However, predicting the growth trajectory at this juncture is little tricky for next few years," said Sneha Poddar of Motilal Oswal.

She further said, "Though, valuing such early stage businesses on plain vanilla financial matrix might not give the right picture and may look distorted. Investors with high risk appetite can subscribe for listing gains given fancy for unique and first of its kind listing in the food delivery business."

As it is the first start-up in the Indian Food Aggregator space to be listed on the bourses, the enthusiasm among the investors about the IPO is tremendous, and also, the company has a unique status of a UNICORN in the Indian Food Delivery space, said Parvati Rai of KR Choksey.

"From the valuation perspective, we are not very comfortable with the sky-high valuation that the IPO is valued at. As a result, we recommend our investors to 'subscribe' to the issue only for listing gains," she added.

Zomato enjoys the first mover advantage and has built a strong brand name and recall across India. Its mobile application is the most downloaded food and drinks app in each of the last 3 fiscal years (as per RedSeer). During FY21, 32.1 million average MAU (monthly active users) visited Zomato's platform, of which 6.8 million MTU (monthly transacting users) placed transaction.

As per RedSeer, Zomato has consistently gained market share over the last four years to become the category leader in India in terms of GOV (gross order value).

Zomato operates in a duopoly market and has created strong entry barriers with widespread network. It operates in a highly underpenetrated market where of the total food consumption in India, only 8-9 percent is from restaurants, of which only 8 percent is online food delivery. This is highly underpenetrated when compared it with bigwigs like US/ China where restaurant food/online food delivery matrix stands at 40-50 percent each. As per RedSeer, Food Services market in India is expected to grow at 9 percent CAGR over CY19-25. Thus "the sector provides huge opportunity for Zomato to grow," said Sneha Poddar of Motilal Oswal.

Among other analysts, Meet Jain of LKP Securities, Shikher Jain of Anand Rathi, Himanshu Nayyar of Yes Securities, and Saurabh Joshi & Ridhima Goya of Marwadi Financial Services also assigned 'subscribe' rating to the issue, while Rajnath Yadav of Choice Broking assigned a 'subscribe with caution' rating for the issue.

"The issue seems to be overpriced at higher end of price band. The company has certain positivities like asset light scalable business model, expanded target market post the pandemic, first mover advantage in food delivery business etc. But its operations in almost duopoly market may attract regulatory actions, which would be negative for the company," Yadav explained.

He further explained, "Also its operations are generating heavy losses, albeit some improvements in FY21, which we believe is not sustainable once socialization normalizes post-pandemic. Thus considering the above observations, we feel that this IPO is not for retail investor, but investors with higher risk appetite with long term investment horizon can apply."

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