Zomato IPO opens, grey market premium weak; should you subscribe for listing gains?

By: and |
Updated: July 14, 2021 12:24 PM

Zomato GMP (Grey Market Premium), Price Band, Allotment/Subscription Status: Zomato shares were trading with a weak premium in the primary market, ahead of its Rs 9,375-crore IPO.

ZomatoIPO, Zomato, grofers Zomato, India’s home grown unicorn, would be the first of many Indian tech startups to list on the stock exchanges.

Zomato IPO Subscription Status, GMP, Price Range: Zomato shares were trading with a weak premium in the grey market just ahead of its Rs 9,375-crore IPO. The public issue will hit Dalal Street today, at the price band of Rs 72-76 per share. On Wednesday morning, Zomato shares were trading at a premium of Rs 5-8 apiece over IPO price of Rs 76, according to the people who deal in shares of unlisted companies. Zomato, India’s homegrown food delivery unicorn, would be the first of many Indian tech startups to list on the stock exchanges. Naukri.com’s parent company, Info Edge holds a stake of about 18.55 per cet in the food delivery platform. The average cost of acquisition of equity shares for the selling shareholders is Rs 1.16 per equity share. The weighted average return on net worth for the last three fiscals is 49.09 per cent.

Research and brokerage firms such as Motilal Oswal Financial Services, ICICI Direct, and Ventura Securities have ‘subscribe’ rating, while Kotak Securities and Axis Securities have not given ratings to the IPO.

Motilal Oswal Financial Services
Rating: Subscribe for listing gains

The brokerage firm said that Zomato 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 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. The valuation also appears expensive at 25x FY21 EV/Sales compared to average of 9.6x 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 high risk appetite can subscribe for listing gains given fancy for unique and first of its kind listing in the food delivery business.

Ventura Securities
Rating: Subscribe for listing gains

Zomato’s IPO will improve its cash levels to Rs 15,000 crore, which will serve as currency for M&A, investments in tech & 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, Zomato’s valuation of 5.1X FY24 EV/Sales may appear optically demanding. However, given the fledgling nature of the business, duopoly market, immense upside penetration potential, humongous untapped online opportunity of the adjacent verticals, and scarcity of premium, the research firm has recommended to subscribe for listing gains

ICICI Direct
Rating: Subscribe

Analysts at ICICI Direct believe that Zomato offers strong growth potential, which at present is evolving on the back of favourable macroeconomics, changing demographic profile, and rising adoption of tech infrastructure. The brokerage firm said the issue is priced at FY20 EV/sales of 17.9x at the upper price band. Zomato is expected to flourish as the restaurant food or food services sector grows. ICICI Direct said that India’s foodservice market will grow to Rs 7.7 lakh crore in the next five years — a massive opportunity for Zomato.

Kotak Securities
Rating: Not rated

Zomato is looking to invest in new products, technologies and features for the benefit of its customers. For example, Zomato are in the process of rolling out a grocery delivery marketplace on its platform on a pilot basis. 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.

Nikhil Kamath, Co-founder and CIO, True Beacon and Zerodha
Rating: Not rated

Nikhil Kamath is looking forward for Zomato’s IPO. He said that Zomato’s market debut will pave the way for other Indian start-ups to go for IPOs in Indian markets, as Indian markets are the best platform for all the stakeholders — company, investors and customers. He added that the average order value of food delivery is consistently growing at 10% for the last 2 years for the company with a good market share. However, Zomato’s valuation at 25x FY21 EV/sales versus 10x for global peers and 12x for Indian QSRs look on expensive the side, Kamath Highlighted. “I feel markets are always ready to accept and accommodate good business, everything depends on how the company sustains its growth and profits going forward. The present time post-Covid 2nd wave looks conducive for the IPOs,” he said.

Axis Securities
Rating: Not rated

Zomato builds relationships with restaurant partners through their offline on-field sales force. They enter into legally binding agreements with restaurant partners who elect to purchase their services, such as advertisement, food delivery, Hyperpure, among others. The creation of listings on their platform is free of charge. The end-to-end Food Services approach makes Zomato the most unique Food Services platform globally combining the offerings of platforms such as Yelp, DoorDash and OpenTable in a single mobile app. Food delivery is highly complex as food is a highly perishable commodity, which requires careful handling while maintaining high levels of hygiene and real-time on-demand service. Company’s precise and real-time, demand forecasting, fleet optimization and intelligent dispatch technology optimizes matching of orders and delivery partners using machine learning.

JST Investments
Rating: No rating; wait and watch

Zomato is raising equity at a rapid pace to fund the business which is a cash-guzzling one. Equity is the costliest form of capital that investors should take note of. The business shifted from the luxury category to the necessity category thanks to the lockdowns. Patience is the greatest moat for investors and we would like to monitor how the competitive landscape evolves and how Zomato creates sustainability on these numbers given how NRAI is stepping up the pressure for direct delivery, Amazon is also testing its delivery in Bangalore and the rise of new-age aggregators such as DotPe, Thrive, Peppo etc that are offering better pricing terms and data sharing. One argument that we hear a lot is Zomato is going to be a tech company or a tech stack like Meituan, or they will go into grocery through Grofers (B2C) and HyperPure (B2B). Both offline and online B2C is a highly competitive market by the likes of Kiranas in offline and Bigbasket, JioMart, etc in the online segment.

(The recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)

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