Zomato IPO to open on July 14, should you subscribe?
Zomato is aiming to raise Rs 9,375 crore through an initial share sale which will conclude on July 19
Analysts hold a mixed view on loss-making food ordering platform Zomato whose Rs 9,375 crore IPO is going to hit the primary market on July 14. The company is aiming to raise Rs 9,375 crore through an initial share sale which will conclude on July 19. The price band for the issue has been fixed at Rs 72-76 per share.
The total IPO size comprises a fresh issue of equity shares worth Rs 9,000 crore and an offer-for-sale to the tune of Rs 375 crore by Info Edge (India) Ltd. Market watchers believe that Zomato has sacrificed operating profitability to achieve faster growth and has been reporting losses.
For the financial year ended March 31, the company has managed to reduced its losses by over 66% as its annual loss dropped from Rs 2,385.6 crore in FY20 to Rs 816.4 crore in FY21. The company posted a loss of Rs 1,010.51 crore in FY19. On the other hand, the revenue of the company increased to Rs 1,993.80 crore in FY21 from Rs 1,312.58 crore in FY19. The figure stood at Rs 2,604.70 crore in FY20.
Should you subscribe?
Motilal Oswal Financial Services
The brokerage has a ‘Subscribe’ rating on the issue. “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,” it said. The brokerage further added that the valuation also appears expensive at 25x FY21 EV/Sales compared to an average of 9.6 times 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,” Motilal Oswal Financial Services said.
Ventura Securities
The brokerage also has a ‘Subscribe’ call on the IPO. It believes that the company may report a profit of Rs 226.70 crore in FY23 against an estimated loss of Rs 577.70 crore in FY22. It also estimated that profit may rise to Rs 479 crore in FY24. “This IPO will improve Zomato’s cash levels to Rs 15,000 crore, which will serve as currency for mergers and acquisitions (Zomato is looking to acquire a minority stake in Grofers for $100 mn), investments in tech and customer acquisitions and general corporate purposes. This cash pile should easily help sustain burn rates for a good 7-9 years. At the upper price band of INR 76 per share, Zomato’s valuation of 5.1X FY24 EV / sales may appear optically demanding,” the brokerage added.
Marwadi Shares and Finance Limited
The company is going to list at a price to sales of 29.9 times based on its FY21 sales with a market cap of Rs 59,623.4 crore. As there are no listed peers in India so valuations cannot be compared on a relative basis. “We recommend to “Subscribe” this IPO as the company is one of the leading foodservice platforms in India having recognised consumer brand equity and is well placed to capitalise on the large market opportunity available in India,” Marwadi Shares and Finance said.
Equinomics Research and Advisory
G Chokkalingam, Founder, Equinomics Research and Advisory advised investors to avoid Zomato IPO. “This valuation reminds me of dot com bubble time valuation and consequent burst. Still, if risk-taking investors apply they should book the moment if the company gets listed at gains. It is a long way to go for Zomato to make reasonable profits to justify current valuation in my view,” he added.