Zomato may list at 30-35% premium with heavy subscription; has few red flags, says Gaurav Garg of CapitalVia

Zomato IPO is set to open for subscription on July 14, with a price band of Rs 72-76 per share. Do you think the issue is reasonably priced on the current financials and expected growth?

In February 2021, Fidelity, Kora Management, Tiger Global, Dragoneer, and Bow Wave were among the investors who invested $250 million, valuing the company at $5.4 billion. The firm has raised nearly $2 billion since last year. Many people are questioning whether the Gurugram-based firm deserves such a high valuation considering its loss-making activities. From fiscal year FY18 to FY20, the food-delivery company has a history of net losses, including a loss of Rs 813 crore in FY21. Even though the firm is losing money, the anchor investors valuations have boosted public confidence, with the corporation aiming for a $10 billion valuation in the next five years. With the expected growth in mind, the issue seems to be reasonably priced when viewed in terms of its valuation.

Zomato is currently trading at a premium of 21-26 percent in the grey market. Do you expect the premium to increase in coming sessions and the listing to be more than 50 percent?

Based on the demand for an internet-based food delivery service, the grey market premium may rise to 27-30 percent. The firm may list at a 30-35 percent premium since it has a few red flags, including competition from its largest rivalry, Swiggy and the ongoing dispute over discounts between restaurants and Zomato.

Why did the Zomato increase its fresh issue size to Rs 9,000 crore from Rs 7,500 crore earlier? Is it getting strong demand from investors or any other reason?

Zomato's Rs 9,375-crore public offering consists of a Rs 9,000-crore new issue and a Rs 375-crore offer for sale by existing shareholder Info Edge. The fresh issue size was increased from Rs 7,500 crore to Rs 9,000 crore. The size of Info Edge's OFS was cut in half, from Rs 750 crore to Rs 375 crore. Despite the fact that the firm is losing money, demand has been growing due to the fact that it is the first unicorn startup to go public and the type of industry it is in. Hence, the company has decided to use the opportunity to raise more capital which will give it good cushion to scale up operation.

Do you think it is a multibagger story?

It's too early to conclude the multibagger. In the long run, competition from Swiggy and Amazon's intentions to enter the market may pose a danger to Zomato. We believe the firm will list at a premium, however, whether it becomes a multibagger or not will depend on how well and how quickly it is able to turn around the operations from a loss making to a profit making unit.

Will the Zomato IPO see a stellar subscription during July 14-16? What could be subscription levels?

Many companies that have gone public in recent years have received more than double-digit (times) subscriptions, with a few companies, such as Easy Trip Planners LTD., receiving triple digits (159 times) subscriptions. On July 8, Zomato confirmed its $100 million investment in Grofers to develop a grocery strategy and said that it would soon introduce a supermarket section on its app. By looking at the market conditions and the demand for the company we may expect a double-digit subscription.

Zomato constantly posted losses, but revenue has been growing every year. What is your view and do you expect the company to turn profitable in coming years?

Startups first take a loss because they need to expand their business, and the pandemic had a negative influence on their operations. In the case of Zomato, it has been expanding its company into other verticals, which means that the expenditures would be larger and may result in losses in the initial years.

Positive unit economics obtained by the food delivery company in 2020 may be a welcome sign, but it is too soon to be called a long-term trend. It's a move in the right direction, but there's still a long way to go. If the trend continues, the company might be able to breakeven by FY23 and then we can see some profits coming in in the following years.

What is the valuing criteria for companies like Zomato which is one of the first unicorns hitting D-Street? How can investors measure the performance of tech-based companies?

Valuing a startup, particularly a tech-based company, is challenging for the investors because while certain data, such as financials, may appear to be bad as the companies may posting losses from years. On the other hand, other factors, such as demand for the company’s products/services and how they are disrupting old businesses with new ideas, may encourage investors to put their money into the firm. 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.

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