Zomato IPO: Key takeaways from analysts meet

Zomato, ahead of its Rs 9,375 crore IPO that opens for subscription on July 14, arranged an analysts meet, following which select brokerages issued their reports with management views on the company and the online food industry. The public offer will conclude on July 16. The price band for the issue has been fixed at Rs 72 to 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.

Zomato, which filed preliminary IPO papers with Sebi in April, obtained its observation on July 2, an update with the regulator showed on Monday. Going by the draft papers, proceeds from the fresh issue would be used towards funding organic and inorganic growth initiatives and general corporate purposes. Edelweiss Securities, which attended the analysts meet last week highlighted the following takeaways from the meet:

Highly underpenetrated

The company sees a huge opportunity in food delivery in India as an increasing number of consumers join the online bandwagon, particularly from tier 2/3 cities, and eating out frequency increases. The company is also exploring opportunities in adjacent areas such as grocery delivery, fitness and nutrition. The stake in Grofers is a financial investment with an opportunity to work with them at a later stage. Profitability will be a function of investments required in new areas. The IPO proceeds are to be utilised for organic growth (customer acquisition, delivery infrastructure and improving technology platform), merger and acquisition and other general corporate purposes.

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No threat from direct delivery

Edelweiss also highlighted that the management does not see a major threat from direct delivery. On the other hand, Zomato will keep exploring various adjacent areas to leverage capabilities.

Edelweiss’ take on IPO

The brokerage concurs with management on the opportunity size. “We believe network effect in the food delivery space is not the strongest. Hence, execution excellence would be key to long-term value creation. At its upper band, the company is valued at $7 billion pre-money, which is a 30% premium to the last funding round,” Edelweiss said adding while growth remains strong, valuation at 19.7 times FY22E and 13 times FY23E price to sales at the higher end of the price band is certainly not cheap. “Global peers trade at 2–12 times price to sales, but Zomato offers much stronger growth and has nearly Rs 15,700 in cash (26% of m-cap) on its books,” it said.