Food-delivery startup Zomato is a day away from launching its Rs 9,375-crore initial public offering, which has generated a great deal of interest and debate over its valuation.
Given the kind of business model, predicting the growth trajectory is a little tricky, says Hemang Jani, Head Equity Strategist, Broking & Distribution, Motilal Oswal Financial Services. In an interview to Moneycontrol’s Kshitij Anand, Jani recommends subscribing the issue for listing gains, saying the market gives premium valuation to such emerging growth stories. Edited excerpts:
The much-talked-about food delivery IPO will hit the Street on July 14. The Rs 9,375-crore IPO looks a tad expensive, especially when it is making losses amid rich valuations. What are your views on the price band?
Zomato is among the most talked-about IPOs of 2021 as it is an internet platform company in a highly underpenetrated market with huge growth potential.
The company looks to raise Rs 9,375 crore from the market and largely comprises of fresh issue, while Info-edge is looking to sell a small stake.
The company is loss-making as it has been in existence only over a decade and has started attaining scale only since FY18. Though it is making losses even at EBITDA level, the losses have reduced significantly as per unit economic turns profitable.
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At the higher end of the price band, Zomato is valued at 25x FY21 EV/Sales which is expensive when compared to average of 9.5x for global peers and 11.6x for Indian peers.
Given the kind of business model, predicting the growth trajectory is also a little tricky over the next few years. Hence, we would recommend investors to subscribe from a listing gains perspective only, as the market would like to give premium valuation to such emerging growth stories.
Also read: Zomato IPO | 'Don't see major listing gains as issue already priced 30% above last round of funding'
There is a saying “stock prices are slaves of earnings”. We know that cash burn is necessary for companies like Zomato to build/grab market share. So, what is the Street discounting?
These new-age internet platform businesses have the potential to disrupt the traditional market and set on a path of high accelerated growth.
Though the journey is gradual and the initial pain point is high but once they achieve economies of scale, then the return potential is tremendous.
Keeping this in mind, Zomato, too, is an upcoming internet platform business that has created a good brand image and is penetrating fast in the online food delivery business.
It has created an entry barrier by massively building upon its network and reach. 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 we compare it with bigwigs like the US and China where 40-50 percent of the total food consumption is from restaurants of which 40-50 percent is online delivery.
Thus Indian market offers huge potential and Zomato with first-mover advantage is placed in a sweet spot.
Also read: Zomato IPO to open next week: 10 key things to know about the issue and the company
Do you think the stock can double on the listing day or at least see a pop of over 50 percent?
Though it’s difficult to say how the stock would play out on a listing day given the current volatility in the market, the demand for technology platform companies is strong.
Investors have a huge frenzy for such niche internet companies that have a good brand and exciting stories around them. So despite Zomato being a loss-making company, it is amongst the most awaited IPOs of 2021.
Thus, at least from a listing gain point of view, there would be a lot of excitement. Since the size is quite large, about Rs 9,000 crore, there is going to be some scope to get allotment both in retail and HNI categories.
Also read: Here's how Zomato makes money
How do you peg Zomato with respect to global peers? Do you think it is expensive?
Yes, the issue looks expensive when we compare it with the global peers. Globally online food delivery players trade at an average EV/Sales of ~10x. Though the majority of them are still loss-making at the PAT level, they have attained a decent business size and have turned EBITDA positive.
On the other hand, Zomato is at a very nascent stage and is making losses even at EBITDA level. Thus if we compare it on EV/Sales basis, Zomato is available at 25xFY21 EV/Sales which is rich when compared to global players who trade at an average of 9.5x FY21 EV/Sales.
But, if we use P/BV for comparison, then Zomato seems reasonably valued as it is available at 3.5x FY21 P/BV vs global peers average of 10.6x.
Also read: Done Deal! IPO-bound Zomato invests $120 million in Grofers
What are 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?
Since Zomato is at an early stage of its business cycle and may require long time-frame to turn profitable, especially given the current challenging times, thus valuing it on a plain vanilla financial matrix might not give the right picture and may look distorted.
Hence, while valuing unicorns such as Zomato, one needs to keep in mind the industry's long-term growth potential, Zomato’s strong brand image, early mover advantage, and its strong network and accordingly give premium.
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