Zomato IPO: No valuation too high as long as there is growth, large market, says Zerodha founder

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Kamath believes Zomato IPO will pave the way for other Indian startups to go for IPOs in the Indian markets, as “Indian markets are the best platform for all the stakeholders, i.e., the company, investors, and customers.”

Zomato IPO: No valuation too high as long as there is growth, large market, says Zerodha founder
Only a decade ago, if someone told you a company with losses to the tune of thousands of crores accumulated over the past several years could be valued at Rs 60,000 crore, you would have likely scoffed at the thought in disbelief. This disbelief stems from the long-held notion that profitability is the raison d'etre—the reason for existence—for all commercial enterprises.
This notion will finally turn on its head for the first time in the Indian markets when food-tech firm Zomato lists in a few days and its valuation is finding backers from various experts, such as Zerodha Founders Nikhil and Nithin Kamath.
Taking to Twitter on Monday, Nithin Kamath said, no valuation is too high “as long as there is growth and a large addressable market.” Though Kamath did not specifically mention Zomato, the food-tech firm has a large addressable market.
In 2019, India’s food consumption market was worth nearly Rs 50 lakh crore, per data from RedSeer. But, most of it was driven by home-cooked food. Restaurant food contributed only 10 percent, according to an ICICI Direct report.
It was expected to grow at the rate of 9 percent per annum. And by 2025, it should have been worth Rs 8 trillion in 2025. But then the economy went under a lockdown. The shock reduced the market size to Rs 2.2-2.5 trillion.
Despite this, the market is likely to grow steadily, taking share away from home-cooked food, the report added. “The growth is expected to be driven by changing consumer behaviour, reduced dependence of millennials on home-cooked food/kitchen set-up, increasing consumer disposable income and spending and higher adoption among smaller cities,” the report added.
But the risk with all high-growth B2C tech IPOs is growth reaching a state of little or no change, Nithin Kamath said. Growth is usually a function of agility and product bets. Since tech companies take more risks and are more agile and aggressive than traditional businesses, they grow faster, he added.
“The question then, will the ability of these companies to be agile reduce because of all the scrutiny that comes after listing? US companies have managed this pressure well. But it is a more mature market. Need to see how this plays out in India,” he said.
Nikhil Kamath, on the other hand, believes Zomato’s IPO will pave the way for other Indian startups to go for IPOs in the Indian markets as “Indian markets are the best platform for all the stakeholders, i.e., the company, investors, and customers.” 
In a note Tuesday, Kamath said: “I am looking forward to the Zomato IPO as it is first of a kind in the Indian markets, food delivery and the restaurant aggregator space.” 
Zomato’s public offering opened for subscription by informal investors on Wednesday. Within a few hours of opening, the issue was 21 percent subscribed.
“I feel the markets are always ready to accept and accommodate good business, everything depends on how the company sustains its growth and profits going forward,” Kamath added.
Zomato’s IPO is live proof of this. The offer has received bids for 15.03 crore equity shares against the IPO size of 71.92 crore equity shares.
The average order value of this food delivery start-up has consistently grown in the last two years with a simultaneous increase in market share, he said. As of March 31, 2021, Zomato was a leading food-service platform in terms of the value of food sold.
In 2018, the company’s order processing value was 30 million. Fast forward two years later, it processed close to 400 million orders. In 2020, the platform was entertaining 3.21 crore, average monthly users.
However, a section of the market is worried about Zomato’s valuation. The company is far from being profitable, despite improvements in its unit economics.
The pandemic wasn't very kind to the company. During the lockdown, the company experienced a dip in gross order value for the first few months. It means, there were fewer users active and even fewer were ordering.
While it is making a profit on every order, other fixed costs components are still under loss. This is why its valuation is worrying some analysts.
Zomato’s valuation at 25x FY21 EV/sales versus 10x for global peers and 12x for the Indian Quick Service Restaurant (QSR) segment looks on the expensive side, Kamath said.
EV/Sales or the enterprise value-to-sales ratio compares the total value of the company to its sales. It tells us how many dollars of EV are generated by one dollar of yearly sales.
The company is still making losses at the net level. And we cannot compare its financial performance with other companies due to the absence of listed food-tech players in India, as Zomato mentioned in its DRHP.
The obvious option is to look overseas.
But the listed peer groups of the world also trade at hefty valuations. “Even though no profits are generated, they sustain those market valuations based on user experience, market position, and tech platforms,” Zomato’s CIO said.
He said the present time, the post-2nd-covid-wave period is conducive for the IPOs.