Ahead of Zomato Ltd’s initial public offering (IPO) opening for subscription on Wednesday, analysts were optimistic about listing gains, but were cautious about the firm’s long-term risks. The expensive valuation demanded at a time the food delivery service company is still making losses and upcoming competition with Amazon’s entry into the segment are making analysts wary.
The IPO, which will raise ₹9,350 crore at the top of the price band of ₹72-76, is one of the largest issues in India after the covid outbreak last year. At this price, Zomato will be valued at ₹59,623 crore, ranking 78th among listed firms in India by market value.
“Predicting growth trajectory at this juncture is a little tricky for the next few years. The valuation also appears 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). Though, valuing such early stage businesses on plain vanilla financial matrix might not give the right picture and may look distorted,” said Sneha Poddar, a research analyst at Motilal Oswal Financial Services Ltd.
However, she added that given its first-mover advantage, Zomato is 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 playing out, the losses have reduced substantially.
Zomato operates in a duopoly—the other player being Swiggy—and has created strong entry barriers with a widespread network. “It operates in a highly under-penetrated market where of the total food consumption in India, only 8-9% is from restaurants, of which only 8% is online food delivery. This is highly under-penetrated when compared with bigwigs like the US or China, where restaurant food/online food delivery matrix stands at 40-50% each,” Poddar said.
As Zomato expects costs and losses to rise as it invests in growing the business, Rashesh Shah, analyst, ICICI Securities, feels it to be risky for the business. Competition from Amazon, cloud kitchen firms such as Rebel Foods and QSRs are other risks, Shah said.
“Zomato is yet to turn profitable. However, this new-age digital platform offers strong growth potential, which at present is evolving on the back of favourable macroeconomics, changing demographic profile and rising adoption of tech infrastructure,” he said.
During FY21, Zomato recorded 32.1 million average monthly active users (MAUs), of which 6.8 million MTUs (monthly transacting users) placed transactions. It is present in 525 cities in India, with almost 150,000 active food delivery restaurant listings and 170,000 active delivery partners at the end of FY21.
Over FY18-21, the company grew its revenue at 62% compound annual growth rate (CAGR). While business is at a nascent stage and began gaining traction since FY18, Ebitda losses have reduced a lot.
According to Jyoti Roy, an analyst at Angel Broking, the Zomato IPO is being valued at price/sales of 28.6-29.9 times FY21 revenues of ₹1,993 crore.
“Post a 23.5% de-growth in revenues in FY21 due to covid, growth is expected to pick up sharply from FY22. Moreover, Zomato has been able to reduce losses in FY21 despite a degrowth in topline,” she said.
Brokerage firm Nomura is positive on the food-tech market and forecasts a revenue potential of $6.5 billion by FY30 and assigns a market value of $18.5 billion to the food delivery segment.
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