Zomato IPO - Approach With Hope, Not on Fundamentals: Experts

The most awaited IPO of the food delivery major Zomato is likely to list on the exchanges on July 27 and the issue opens for subscription on Wednesday, July 14. The appetite for the offer seems to be strong among investors across the country, given the company's business model and further growth projections. The company has also successfully raised Rs 4,196 crore from Anchor investors ahead of their IPO. 

However, the financials of the company, pricing of the IPO, and other valuation figures have turned around as a matter of concern for investors and also experts, as it becomes difficult to rate a loss-making startup, having no domestic listed peers. Few experts also stated about the offer looking expensive for the investors, as there are no domestic peers to compare the business and it looks expensive if compared with companies across the globe. 

"On the global scene, such aggregators are valued at 8 to 9 times their revenues whereas, for Zomato coupled with India perspective, it is valued at 16+ and thus highly overvalued (almost double). Secondly, there are so many "ifs" and "buts" for this company's progress going forward," said Dilip Davda - Senior IPO Expert. 

Major brokerage houses and experts suggest that investors with a high-risk appetite should look to subscribe to the offer for listing gains as the company being first of its kind in the Indian market brings within a fancy trend and will also catch a higher response when listed. While some experts also explained on how to approach the company with hopes of this turning out to be the next Amazon or Alibaba. 

“These companies should be approached with hopes and not fundamentals at the initial stage. One should look at it with the perspective of such companies turning out to be the next Amazon or Alibaba in the coming years,” said a senior market expert on the matter. 

Shedding a light on the valuation of the company, Motilal Oswal, in their IPO Note, said, "Predicting the growth trajectory at this juncture is little tricky for 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." 

However, ICICI Direct in their IPO note has initiated a subscribe coverage for the offer, given the company's growth potential which is currently evolving on the back of favorable macroeconomics. 

"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 favorable macroeconomics, changing demographic profile, rising adoption of tech infrastructure. Hence, we recommend Subscribe to this IPO,'' said ICICI Direct. 

In the business segment of the company, the company has however failed to make overall profits in the previous years but given the pandemic in place, the company has significantly seen a good profit on a per order basis, an expert said reviewing the IPO. 

With the frenzy of IPOs in the market and Zomato being a new-age company, the grey market premium was also seen between Rs 11-16, hinting at a 14-21 per cent upside during the listing at the upper price band of Rs 76/share. 

In the share sale to the public, InfoEdge, which currently holds more than 18 per cent of the stake in the company, will offload shares worth Rs 375 crore and the company will issue fresh shares worth Rs 9,000 crore to the public. Given the company’s plans in engaging in the grocery business and eyeing investments, the company raised its offer size from what it has planned earlier, said experts with knowledge of the matter.  

Zomato posted a consolidated loss of Rs 816.43 crore in the financial year ended March 2021 against a loss of Rs 2,385.6 crore in the previous year. However, the company's revenue increased sharply by 98.4 per cent from Rs 1,312 crore in FY19 to Rs 2,604 crore in FY20.