Zomato IPO | Astha Jain of Hem Securities tells us what to expect from the listing

The initial public offering of Zomato, one of the leading food service platforms in India, got fully subscribed on July 14, the first day of bidding. The retail investors were at the forefront as the portion reserved for them was subscribed 2.69 times.

The Street is pricing in the future growth potential that would arise out of rolling out a grocery delivery marketplace on the company’s platform along with the company’s continuous investment in branding activities and growing Zomato Pro membership base, Astha Jain, Senior Research Analyst at Hem Securities said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

A) We feel that pricing is done on the higher side if we compare it to the global peers on EV/Sales or Price/Sales multiple basis. The company is demanding premium valuation which is much higher than its peers.

According to us, on a Price/Sales multiple of more than 20x on FY22E Revenue is much higher than its global peers like Doordash, Meituan, Yelp, Delivery Hero.

Similarly, on EV/Sales multiple, the company is commanding a higher premium to its global peers which make the issue priced on the higher side at a price band of Rs 72- 76 per share.

A) Zomato is sustaining the cash burn through the regular inflow of funds from investors. Zomato has consistently gained market share over the last four years to become the category leader in the food delivery space in India in terms of GOV or gross order value from October ‘20 to March ’21.

The Street is discounting future growth arising out of rolling out a grocery delivery marketplace on the company’s platform on a pilot basis along with company’s continuous investment in branding activities and growing Zomato Pro membership base.

A) We believe that on a listing day, the stock might list at a limited premium to its issue price due to high valuation. But, we don’t think that it will double or list at 50% pop up on a listing day.

Also, from our point of view -- listing day demand and supply scenario will play a key role on account of the large issue size. Hence, price volatility can be seen on a listing day.

A) Yes, when we compare Zomato to its global peers definitely valuation appears to be on the higher side but we always attach a premium to valuation when it comes on part of any Indian company getting listed mainly on account of the high growth prospects of a large underpenetrated market it operates in.

On future financials basis, the company is trading at 12-13X EV/sales which again signals pricing being on the higher side.

A) Analyzing Tech-based companies on traditional valuation methodology doesn’t seem to be an appropriate phenomenon as these companies are always analysed on their future growth prospects and can be seen for long-term horizon rather than shorter time duration.

As these startup companies are mostly loss-making at the initial level hence analysing them on their earnings may not give true picture.

Therefore, these companies need to get valued on their future growth prospects which reflects the true picture.