Food delivery company Zomato Ltd. (Zomato) - a food delivery company, is planning to raise up to Rs 9,375 crore through an IPO, which opens on July 14 and closes on July 16, 2021. The price band is in the range of Rs.72-76 equity shares. The total issue size is aggregating up to Rs 9,350 crore which comprises fresh issue of equity shares aggregating up to Rs 9,000 crore and Offer for sale of equity shares aggregating up to Rs 350 crore. The shares will be listed on BSE and NSE.
On the back of robust demand from investors, Zomato has increased the fresh issue size by 20 percent. However, its only selling shareholder i.e. Info Edge India Ltd. has reduced the OFS size to Rs 375 crore from Rs 750 crore planned earlier. In the recent past, Zomato has executed couple of small sized private placements, which were at significant discount to the issue price.
Subscribe, says Marwadi Shares and Finance
Saurabh Joshi Research Analyst at Marwadi Shares and Finance Limited believes that the company is going to list at a P/S (Price to Sales) of 29.9X based on its FY21 sales with a market cap of Rs. 5,96,234 million. As there are no listed peers in India, so valuations cannot be compared on a relative basis. "We recommend to “Subscribe” to this IPO as the company is one of the leading foodservice platforms in India having recognized consumer brand equity and is well placed to capitalize on the large market opportunity available in India."
'Issue seems overpriced': Choice Broking
Choice Broking said, currently Zomato is a loss-making company. Also, there is no listed domestic peer having same line of business as the company. "We have considered global peers for valuation benchmarking. At higher price band of Rs. 76, Zomato is demanding a FY21 P/S multiple of 29.9x, which is at premium to the global peer average. Thus the issue seems to be overpriced," the brokerage said.
The company has certain positive points like asset light scalable business model, expanded target market post the pandemic, first mover advantage in food delivery business etc. But its operations in almost duopoly market may attract regulatory actions, which would be negative for the company. Also its operations are generating heavy losses, albeit some improvements in FY21, which we believe is not sustainable once socialization normalizes post-pandemic. Thus considering the above observations, we feel that this IPO is not for retail investor, but investors with higher risk appetite with long term investment horizon can apply. Thus we assign a “Subscribe with Caution” rating for the issue, Choice Broking said.
Gains market share: Kotak Securities
Food Services is a competitive market in India comprising food delivery players like Zomato and Swiggy, cloud kitchens like Rebel Foods and branded Food Services players (including quick service restaurants like Dominos, McDonalds and Pizza Hut, among others). Food delivery players also compete with multiple other participants in the Food Services industry including restaurants which own and operate their own delivery fleets, traditional offline ordering channels, such as take-out offerings and phone-based ordering, local publications, and other media, both online and offline where restaurants place their advertisements to attract customers.
In this competitive market, Zomato has consistently gained market share over the last four years to become the category leader in the food delivery space in India in terms of GOV from October 1, 2020 to March 31, 2021.
B2B, B2C offerings increase value of platform: Axis Capital
Zomato is one of the leading Food Services platforms in India in terms of value of food sold, as of March 31, 2021. During fiscal 2021, 32.1 million average MAU visited their platform in India. As of March 31, 2021, they were present in 525 cities in India, with 389,932 Active Restaurant Listings.
The company’s business is built around the core idea that over time, people in India are going out to eat at restaurants more than they cook at home.
To capture value out of this shift in customer behaviour, they have two core business-to-customer (B2C) offerings: Food delivery and, dining-out. In addition to their business-to-business (B2B) offering Hyperpure. Another important part of their business is Zomato Pro, their customer loyalty program encompasses both food delivery and dining-out. Each of their B2C as well as B2B offerings help increase the value of their platform for their customers, enabling them to further attract new customers and to deepen engagement with existing customers. Each of their offerings also helps improve assortment, affordability, accessibility and quality (“AAAQ”) of restaurant food for their customers thereby helping grow the restaurant industry.
Zomato has consistently gained market share over the last 4 years to become the category leader in the food delivery space in India in terms of Gross Order Value (“GOV”) from October 1, 2020 to March 31, 2021. The company generates a majority of their revenue from food delivery and the related commissions charged to their restaurant partners for using their platform. Restaurant partners also spend for advertisements on their platform.
The COVID-19 pandemic disproportionately affected the food services industry in India. In the first quarter of fiscal 2021, Zomato saw a significant impact on their business and their food delivery business in India hit its lowest in terms of GOV in a quarter in two financial years. However, since then, their food delivery business in India has recovered strongly, with GOV growth of 91.6 percent and 42.3 percent and 11.1 percent in the second, third and fourth quarters of Fiscal 2021 respectively, over the immediately preceding quarters. Their GOV in the fourth quarter of fiscal 2021 was Rs 3,313.02 crore which was the highest GOV that they have achieved in any quarter till March 2021. There is no adverse impact of the second wave of the COVID-19 pandemic on their food delivery business in India.
Expect listing gains despite punchy valuations: Yes Securities
The IPO is expected to generate lot of interest given the company uniqueness, large opportunity size and some evidence of scale economies, but the valuations look really expensive on conventional parameters at 25x FY21 EV/sales vs 10x for global peers and 12x for Indian QSRs, with the path to profitability also unclear.
"While the current frenzy should deliver some listing gains, we would await more clarity on capital allocation plans, competitive activity and unit economics over the next few quarters to provide a more nuanced fundamental view on the company. Out of Rs 93.8 billion IPO proceeds, Rs 90 billion will come to the company out of which Rs 67.5 billion will be utilized for organic and inorganic growth initiatives. Key risks going forward would be emerging competition from well-funded groups and NRAI, losses from new investments and diversification initiatives, Yes Securities said.
Subscribe for limited listing gain, high long-term gain: Hem Securities
Zomato is bringing the issue at 20x of Price/Sales & EV/Sales multiple on post issue FY22 basis. It is an asset-light organization with its core asset as the technology basis infrastructure which is one of the drivers for company’s business in the future.
Zomato has consistently gained market share over the last four years to become the category leader in the food delivery space in India in terms of GOV. Hem Securities believes that going forward, "funds deployment towards customer and user acquisition and retention expanding delivery and technology infrastructure will increase the growth prospects of company and make it candidate for long-term investment. However looking at the higher valuation which the company is demanding at present level, we recommend “Subscribe” the issue for limited listing gain and high long-term gain."
