The initial public offering (IPO) of food delivery giant Zomato opens for subscription today with a price band fixed at Rs 72-76 per equity share. The Rs 9,375-crore offer will close on July 16.
Zomato is the first Indian unicorn to go public and will be followed by other startups including PayTm, Policy Bazaar, among others.
The company is loss-making and has negative earnings per share (EPS), thus the P/E ratio is not relevant for the valuation of the company. Further, Zomato does not have any domestic peers in the same line of business.
Analysts believe the company has certain positivities like asset-light scalable business model, expanded target market post the pandemic, first-mover advantage in the food delivery business, etc. But its operations in an almost duopoly market may attract regulatory actions, which would be negative for the company.
Hence, brokerages have recommended investors with high-risk appetites subscribe to the issue only for listing gains.
However, given the strong network effects, increasing frequency of order, huge scope for growth in tier-II and tier-III cities, and large addressable market, the long-term outlook looks promising for Zomato, brokerages said.
Here’s what brokerages have to say:
Zomato is yet to turn profitable. However, this new-age digital platform offers strong growth potential, which at present is evolving on the back of favourable macroeconomics, changing demographic profile, rising adoption of tech infrastructure. Hence, we recommend ‘subscribe’ to 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 a couple of moats and with the economics of scale started playing out, the losses have reduced substantially.
However, predicting the growth trajectory at this juncture is a little tricky for the next few years. The valuation also appears expensive at 25x FY21 EV/Sales compared to an average of 9.6x for global peers and 11.6x for Indian QSRs.
Though, valuing such early-stage businesses on a plain vanilla financial matrix might not give the right picture and may look distorted. Investors with a high-risk appetite can ‘subscribe’ for listing gains given fancy for unique and first-of-its-kind listing in the food delivery business.
At the upper price band of Rs 76 per share, Zomato’s valuation of 5.1X FY24 EV / Sales may appear optically demanding. However, given the fledgling nature of the business, duopoly market, immense upside penetration potential, a humungous untapped online opportunity of the adjacent verticals, and scarcity premium we recommend a ‘subscribe’ for listing gain.
Currently, the company is loss-making. As compared to global peers, Zomato’s issue is at a premium to the global peer average and thus seems to be overpriced. Its operations are generating heavy losses, albeit some improvements in FY21, which we believe is not sustainable once socialisation normalises post-pandemic.
Thus, we feel that this IPO is not for retail investors, but investors with a higher risk appetite with a long-term investment horizon can apply. We assign a ‘subscribe with caution’ rating for the issue.
We believe Zomato is very richly valued at $9 billion given its status as a company that is yet to make any profit. However, 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.
Also, the company has a unique status as a unicorn in the Indian food delivery space. 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.
The IPO is expected to generate a lot of interest given the company uniqueness, large opportunity size, and some evidence of scale economies, but the valuations look expensive on conventional parameters at 25x FY21 EV/sales vs 10x for global peers and 12x for Indian QSRs, with the path to profitability also unclear. While the current frenzy should deliver some listing gains, we would await more clarity on capital allocation plans, competitive activity, and unit economics over the next few quarters to provide a more nuanced fundamental view of the company.
Key risks going forward would be emerging competition from well-funded groups and NRAI, losses from new investments, and diversification initiatives.
Zomato has been able to reduce its losses in FY2021 despite degrowth in the topline. We expect losses to reduce further over the next couple of years due to a rebound in growth and improving unit economy.
Given a 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 recommend ‘subscribe’ to the IPO.
Arihant Capital Markets
We like the company because of its widespread and well-organised on-demand hyperlocal delivery network, acknowledge consumer brand equity across India, among the leading food service delivery platforms with a strong network of 131,233 restaurants and 161,637 delivery partners, who fulfilled 94.9 percent of order delivery.
Zomato is highly personalised, intuitive, simple to use, visually appealing, and is designed to drive high engagement with the customers. We recommend investors to ‘subscribe’ for the long-term buy for investors with a higher risk appetite.
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