Jyoti Roy, DVP- Equity Strategist at Angel Broking feels the Zomato IPO is valued at price-to-sales of 29.9 times FY21 revenues of Rs 1,993 crore which is at a premium to other comparable global food delivery platforms.
“While the Zomato IPO may seem expensive based on FY21 numbers, we believe that FY21 was an aberration as business was impacted significantly due to the first Covid wave and the ensuing lockdowns,” he said in an interview to Moneycontrol’s Sunil Shankar Matkar.
He feels a better way to value Zomato will be on price to sales basis and compare with other global food delivery companies which are expected to witness similar growth trajectory over the next few years like DoorDash, Deliver Hero, etc.
Edited Excerpts:
1) Zomato is currently trading at a premium of 21-26% in the grey market. Do you expect the premium to increase in the coming sessions?
We believe that there will be a healthy demand from both institutional and retail investors alike. Given the very strong multi-year growth prospects, strong demand, there is a high likelihood that the IPO will open at a premium to the issue price.
2) Why did Zomato increase its fresh issue size to Rs 9,000 crore from Rs 7,500 crore earlier?
Given the multi-year growth prospects for the food delivery industry, Zomato is raising growth capital for funding both organic and inorganic initiatives. We believe that Zomato is raising capital not only to invest in the business but also to build a war chest for any inorganic growth opportunity that might come their way. Moreover, a buoyant capital market is also leading to increased demand from investors.
Also read – Zomato IPO to open this week: 10 key things to know about the issue and the company
3) Zomato IPO is set to open for subscription on July 14, with a price band of Rs 72-76 per share. Do you think the issue is reasonably priced?
The IPO is valued at price-to-sales of 29.9 times FY21 revenues of Rs 1,993 crore which is at a premium to other comparable global food delivery platforms. While the Zomato IPO may seem expensive based on FY21 numbers, we believe that FY21 was an aberration as business was impacted significantly due to the first Covid wave and the ensuing lockdowns.
One also needs to keep in mind that Zomato will have a much longer runway for growth given the lower penetration of food delivery in India as compared to developed and other Asian markets like China and Korea. Therefore, given the strong growth prospects, high barriers to entry and duopoly nature of the food delivery business, in India we believe that Zomato will command a premium to global peers thus justifying the price band.
Also read – Hard to say if Zomato could be a multibagger story: Prashanth Tapse of Mehta Equities
4) Do you think it is a multibagger story?
We believe that food delivery business in India still has 5-10 years of very high growth ahead of them. Given the multi-year growth story we believe that Zomato would be a wealth creator for investors over the next decade.
5) Zomato constituently posted loss but revenue has been growing every year. What is your view and do you expect the company to turn profitable in coming years?
Despite registering multi-fold growth in revenues from Rs 466 crore in FY18 to Rs 2,605 crore in FY20 the net loss figure widened from Rs 107 crore to Rs 2,386 crore in FY21. The company was incurring losses in the early years as it was in an investment phase and burning cash to gain market share. However the company has started its turnaround in FY21 as Zomato managed to reduce losses to Rs 816 crore despite registering a 23.5 percent YoY degrowth in revenues due to tight costs control and better unit economics. With growth expected to pick up in the coming years after a Covid impacted FY21, we expect the company to breakeven at the EBIDTA and PAT level in FY22 and FY23 respectively given improving unit economics.
Also read – Zomato may list at 30-35% premium with heavy subscription; has few red flags, says Gaurav Garg of CapitalVia
6) Will the Zomato IPO see a stellar subscription during July 14-16? What could be subscription levels?
While it is very difficult to put an exact number to the subscription number, we expect very strong demand for the IPO leading to stellar subscription.
7) What is the valuing criteria for companies like Zomato which is one of the first unicorns hitting D-Street? How can investors measure the performance of tech-based companies?
Zomato will seem expensive on a price-to-earnings (P/E) basis despite the expected turnaround in FY23 and therefore we believe that traditional matrices like P/E will not be the right measure to value the companies A better way to value such high growth companies will be on Price to sales basis and compare with other global food delivery companies who are expected to witness similar growth trajectory over the next few years like DoorDash, Deliver Hero etc.
Also read – Zomato IPO | Stock market valuation benchmarks might have to change
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