Opportunity for Zomato to grow the market and revenues are huge: Jitesh Ranawat of Marwadi Shares

Market Outlook

Being a two player market (Zomato & Swiggy) with a similar market share, the opportunity for Zomato to grow the market and revenues are huge, Jitesh Ranawat – Head Institutional Sales at Marwadi Shares and Finance Ltd., said in an interview with Moneycontrol’s Kshitij Anand. Edited excerpts:

Q) The much-talked-about food delivery IPO will hit the Street next week. The Rs 9375 cr IPO looks a tad expensive especially when it makes losses amid rich valuations. What are your views based on the price band?

A) The IPO is richly valued and we do not think there is much upside left on listing considering it is a loss-making company. Although, the future for the next 5 years looks promising considering the under penetration of food delivery service and favourable demographics with increasing internet access in India.

Being a 2 player market (Zomato & Swiggy) with a similar market share, the opportunity to grow the market and revenues are huge.

Changing consumer behaviour and reduced dependence on home-cooked food and increasing disposable income will all contribute to growth.

Q) There is a saying “stock prices are slaves of earnings’. We know that cash burn is necessary for companies like Zomato to build/grab market share. So, what is Street discounting?

A) The Street is well aware that it’s a loss-making business and would be discounting the growth in revenues considering it generally chases revenues for grabbing market share and increasing penetration.

The food delivery platform is the major source of revenue and loyalty programs like the Gold membership got affected due to covid which as of now contributes roughly 10% of the revenues.

So it is a futuristic business that will be difficult to value considering there are no profits and would have to be valued at Price/Sales and EV/Ebitda basis only.

Q) Do you think the stock could well double on listing day? Or at least we could see a pop of over 50%?

A) Considering the issue it looks fully priced in and we don’t think it will have a bumper listing wherein we can make 100% or 50% gains on listing day.

We can expect small gains on listing day considering it is one of the leading foodservice platforms in India having recognized consumer brand equity and is well placed to capitalize on the underpenetrated market.

The IPO money will help the company to stay afloat for the next 6 to 7 years considering its cash burn.

Q) How do you peg Zomato with respect to global peers? Do you think it is expensive?

A) Yes considering the valuations compared to the global peers it looks expensive but there is a tremendous opportunity to grow the business considering the large market opportunity available in India and that is the reason it will always look optically expensive compared to its global peers. It’s the premium of expected growth that is attached to its valuations versus global peers.

Q) 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?

A) These Tech Platforms need to be measured in terms of market share and revenue growth as they are not making any money right now and there is a scarcity premium as it’s the only food delivery tech platform available today in listed space.

These kinds of companies will need to be measured on Price to Sales, Price to Book, EV/Ebitda and EV/Revenues basis.

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