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Zomato IPO: Loss-making Unicorn’s valuation at premium to global peers

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Zomato IPO has already generated a lot of interest among retail investors given the company’s uniqueness, but concerns prevail over its valuations as the company is still “loss-making” and has no listed peer in the Indian market.

Zomato IPO: Loss-making Unicorn’s valuation at premium to global peers
Startup unicorn food delivery platform Zomato is set to launch its initial public offering (IPO) on July 14. With the Rs 9,375-crore offer Zomato is eyeing a valuation of  Rs 64,365 crore or $8.7 billion.
The IPO has already generated a lot of buzz among institutional and retail investors alike, given Zomato's rapid growth over the last few years. However, a section of the market is worried about valuations as Zomato is still making losses at the net level, and there is no way to compare its financial performance due to the absence of any listed food-tech players.
Because Zomato is making losses, it has negative earnings per share (EPS), and so the P/E ratio is not relevant.
So analysts are comparing the valuations of Zomato with globally listed peers in the same line of business.
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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, which can help propel value, but its operations in an almost duopoly market may attract regulatory actions, which would be negative for the company.
In the global market, the company’s peers include Door Dash, Delivery Hero, Just takeaway, Meituan and Deliverooo.
Jyoti Roy, DVP- Equity Strategist at Angel Broking believes Zomato IPO is valued at price/sales of 28.6-29.9x FY2021 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,” Roy said.
Given a strong delivery network, high barriers to entry, expected turnaround and significant growth opportunities in tier-II and tier-III cities, Roy believes that Zomato will command a premium to global peers.
Over the period FY18-21, Zomato’s revenues grew at a CAGR of 62.3 percent to Rs 1,994 crore from Rs 466 crore (FY18). Analysts expect it to grow at a CAGR of 64.7 percent to Rs 8,910 crore by FY24.
While business is at a nascent stage and has just started gaining traction since FY18, the EBITDA losses have reduced substantially with the scale-up in the business and per-unit economics turning profitable.
Brokerage firm KR Choksey applied appropriate EV/Sales multiple to Zomato after comparing it with globally listed food delivery companies.
On a peer comparison basis, Zomato valuations seem fairly attractive. As per peer valuation matrix, Zomato’s EV/Sales multiple of 5.75x is arrived after considering its FY24E sales of Rs 6,588 crore.
This seems fairly priced as compared to Delivery Hero SE’s 12.43x. Other food delivery operators such as Just Eat Takeaway (5.71x), GrubHub (3.26x) and Goodfood Market Corp (1.60x) are in a race to catch up with the leader.
KR Choksey also has used recent private deals or fundraising activities of unlisted food delivery companies as benchmarks to arrive at an average EV/Sales multiple for these deals.
"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 of a UNICORN in the Indian Food Delivery space," it said.
From the valuation perspective, KR Choksey is not very comfortable with the sky-high valuation that the IPO is valued at.