Zomato Ltd’s initial public offering (IPO) is opening for subscription on Wednesday. Analysts are optimistic about listing gains but are somewhat cautious about the firm’s long-term risks. Zomato’s expensive valuation is coming at a time when the food delivery service company is still making losses. Also, the upcoming competition with Amazon’s entry into the segment is making analysts wary.
The IPO, which is likely to raise ₹9,350 crores at the top of the price band of ₹72-76. This is one of the largest issues in India after the covid outbreak last year. At this price, Zomato’s valuation will be at ₹59,623 crores, ranking 78th among listed firms in India by the sheer market valuation.
Prediction for the future growth trajectory for the next few years is a little tricky at this point. The food delivery company’s valuation looks expensive at 25 times FY21 enterprise value to sales compared to an average of 9.6 times for global peers and 11.6 times for Indian quick-service restaurants (QSRs). While the valuation for such early-stage businesses on plain vanilla financial matrix might not give the right picture and may look distorted. According to Sneha Poddar, a research analyst at Motilal Oswal Financial Services Ltd.
However, Sneha also added that given its first-mover advantage, Zomato is in a sweet spot. Since the online food delivery market is at the cusp of evolution there are certain advantages for Zomato. The company surely enjoys a couple of moats and with the economics of scale playing out, the losses have reduced substantially.
How analysts are looking towards Zomato's IPO
Zomato is operating in a duopoly, and the other big player being Swiggy. It has created a strong entry barrier with a widespread network. The food delivery company is operating in a highly under-penetrated market. Of the total food consumption in India, only 8-9% is from restaurants, of which only 8% is online food delivery. There is a highly under-penetration in contrast to the bigwigs like the US or China, where restaurant food/online food delivery matrix stands at 40-50% each.
Rashesh Shah, analyst, ICICI Securities says as Zomato expects costs and losses to rise as it invests in growing the business, it may be risky for the business. The upcoming competition from Amazon, cloud kitchen firms such as Rebel Foods, and QSRs are other risks. Zomato is yet to turn profitable.
However, this new-age digital platform has strong growth potential, which at present is in its evolution. This evolution is driven by favourable macroeconomics, changing demographic profile, and rising adoption of tech infrastructure.
According to Jyoti Roy, an analyst from Angel Broking, the Zomato IPO is being valued at price/sales of 28.6-29.9 times FY21 revenues of ₹1,993 crores. After a 23.5% de-growth in revenues in FY21 due to covid, growth is likely to pick up sharply from FY22. Moreover, Zomato has been able to reduce losses in FY21 even after the degrowth in the topline. For more Zomato news, read this article!
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