Prashanth Tapse VP Research at Mehta Equities says Zomato will be a tough bet for a “multibagger story” as the accumulated losses of the company has piled up and it only requires more capital to keep the business going.
Moreover, with global giants like Amazon also gunning for a share in the nascent market, their deep pockets might mean trouble for local food aggregators like Zomato and Swiggy.
Edited excerpts:
Q: Zomato IPO is set to open for subscription on July 14. Do you think the issue is reasonably priced on the current financials and expected growth?
Considering all the factors such as current financials and expected growth rationales on investment, I feel the IPO valuation seems to be aggressively priced and the only concern as an investor would be regarding turnaround time to become a profitable business, which will change the business valuations going forward. Now the question is, “Will Indian markets digest this expected valuation and give them the asking price which is a billion-dollar question to all investors?”.
Q: Zomato is currently trading at a premium of 21-26 percent in the grey market. Do you expect the premium to increase in the coming sessions and the listing to be more than 50 percent?
Considering the current environment, FoodTech business, particularly food delivery or aggregators has been one of the most heated sectors over the past year and grey market demand mirrors the same picture. Hence, we assume the premium can trade in the range between 30-40 percent going forward on the best case.
Q: Why did Zomato increase its fresh issue size to Rs 9,000 crore from Rs 7,500 crore earlier? Is it getting strong demand from investors or any other reason?
I believe Zomato had made the right decision to increase fresh issue size to Rs 9,000 crore under the Sebi rule mainly to tap the demand after witnessing strong investors’ interest for such businesses from both foreign and domestic investors. Globally investors are keen to invest in India’s ‘FIRST OF ITS KIND’ business which is gaining a lot of interest for a business model which is rapidly increasing footprints in online food businesses.
Q: Do you think it is a multibagger story?
It difficult to say ‘A Multibagger Story’ at this point in time when accumulated losses are huge and I expect more cash burning activity could come in going forward as global giants like Amazon is also entering this food aggregating space with deep pockets to disturb players like Zomato or Swiggy. This can raise the cost to Zomato to burn more and more cash to acquire more new customers and stay in the business.
For a multibagger story, one should look at from a 4-5 years horizon, rather than just a 1-2 years horizon because as of now these companies are valued on the basis revenue multiples and they are not making profits at net levels and once the business starts generating positive operating cash flow on net basis. Hence, at this juncture, I will wait and watch them performing and analyse before taking them seriously.
Q: Will the Zomato IPO see a stellar subscription during July 14-16? What could be subscription levels?
Big sized IPO offers generally make big noises at the time of debuting but post listing the noise goes out which is my experience in the last one decade. Zomato is also making the same kind of noise and has timed its initial public offer at the right time to encash the investors’ euphoria. With aggressive IPO valuations, it would be difficult to assume subscription levels, I can only say it can be a good listing candidate considering FoodTech internet business excitement in investors.
Q: Zomato consistently posted losses but revenue has been growing every year. What is your view and do you expect the company to turn profitable in the coming years?
I believe for Zomato kind of business model it will take another 1-2 years to have a business generating sustainable profits as the industry is still in a nascent stage which needs huge cash-burning cycles to acquire new customers to stay in the business for a long time.
As per latest management talks, they say in December 2020 they have turned profitable on per order basis which is in the times when people are forced to stay at home and regularly using such services, but we believe, this profitability would be a part of windfall benefit of ongoing lockdowns due to Covid pandemic situations.
If you ask me when could such companies turn profitable? I would say 1 to 2 years if business sustains well. I believe India is going through a revolutionary phase in the last few quarters. Factors that are propelling India’s online food delivery market are changing lifestyle and eating habits. Hectic schedule and growing disposable income in India pushes people towards ready-to-eat food at a discounted rate. Besides, rising digitalization among millennials and increasing proportion of working women in India are also driving the online food delivery trends in India. In recent years, the FoodTech market has shown huge prospects and attracted heavy investments as India Online Food Delivery Market is expected to be $ 21.41 billion by 2026, from $ 4.66 billion in 2020 with a staggering CAGR of 28 percent till 2026.
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?
Being first of its kind business model debuting capital markets, I can try valuating them based on Market cap to sales multiples or Enterprise value to sales multiples which is globally a standard way to look such business in the initial stage where losses are in net levels. Based on this investors can compare one to one and take holistic long term view. I also advise Investors should also try to measure operating performance metrics such as growth in monthly average users (MAU), gross order value (GOV) MoM and monthly deliveries trend which gives a better MoM picture to get good hold on understanding business viability.
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