Zomato IPO: Grey market premium almost halves to Rs 10.50 per share

The launch of one of India’s most awaited initial public offering (IPO) is just two days away and is trending everywhere from Twitter, Google, to banter with office colleagues or WhatsApp groups of friends and family. The food delivery giant IPO is the talk of the town as it paves way for retail investors to participate in India’s booming start-up and new economy businesses.

Amidst all the hype around the IPO, one needs to keep in mind that the portion allocated for retail investors is just 10% of the entire IPO size. Also, it is a loss-making company while Zomato narrowed losses to Rs 816.42 crore in FY21 from Rs 2,386 crore in FY20. It had reported a Rs 1,010 crore loss for FY19. Zomato in its DRHP said it expects costs to increase over time. “Our losses will continue, given significant investments expected towards growing our business,” the IPO filing documents said.

About the IPO

The Rs 9,375-crore public offer comprises fresh issuance of equity shares of Rs 9,000 crore, and an offer for sale of Rs 375 crore by existing selling shareholder Info Edge. The three day issue opens on July 14 and the bidding will close on July 16.

The price band of the IPO has been fixed at Rs 72-76 per share. Investors can bid for a minimum of 195 equity shares and in multiples, thereafter, translating to a minimum bidding amount of Rs 14,820 at the higher end of the price band. A retail investor can at max apply for 13 lots or 2535 shares for Rs 1,92,660.

The food delivery giant will utilise its net proceeds from fresh issue for funding organic and inorganic growth initiatives (Rs 6,750 crore); and general corporate purposes.

Grey market chatter

Ahead of the IPO, in the grey market, its shares are quoting at 86.50 implying a premium of Rs 10.50 or 13.81%. The grey market premium has almost halved to Rs 10.50 compared to Rs 18 when the company announced its IPO dates and price band.

Abhay Doshi, Founder of Unlisted Arena who tracks grey markets explains that the premium has fallen mostly due to Zomato being the first mover in the space so it’s difficult for the market to ascertain valuations as the company is still posting a loss.

Also, the size of IPO is too big which may be ensuring enough supply which may also be the reason.
“Companies like Zomato will not be valued as per the traditional valuation methods. In spite of such companies posting losses, they are valued even more than some traditional giants. However, such disruptive businesses are a double-edged sword, as the entry of any big, pocketed player may pose a serious threat to the business,” Doshi added.

For a longer-term view, one needs to constantly track the company’s performance, acquisitions, expansions and whether the company is heading on the path of profitability on a continuous basis, cautioned Doshi.

Expert view

Independent market expert SP Tulsian is of the opinion that Zomato’s IPO is an expensive serving. “Growth in food delivery/dining is secular, and Zomato is trying to play it via a first-mover IPO. But the evolving business model, requiring growth capital for scale-up and new verticals is unacceptable, which coupled with a competitive landscape and unjustified IPO pricing makes the risk-reward ratio unfavourable,” said Tulsian.

IPO timeline

The issue is likely to finalize the basis of allotment by July 22, and the initialization of refunds will take place by July 23. While the credit of equity shares to depository accounts of the allottee will be done on July 26. The company is expected to make its stock market debut on July 27, 2021.