Food-delivery startup Zomato launches its Rs 9,375-crore initial public offering on July 14, as a growing number of internet companies look to tap the primary market.
Amid a debate over the IPO’s pricing and the company’s prospects, Abhishek Jain, Head of Research, Arihant Capital, says on the traditional parameters, valuations are definitely on the higher side but weighed against global peers, the Gurugram-based Zomato offers a better growth prospectus.
In an interview to Moneycontrol’s Kshitij Anand, Jain says considering the current GMP, a 20 percent pop is possible on the listing day. Edited excerpts:
The much-talked-about Zomato IPO has finally hit the Street. The Rs 9,375-crore IPO looks a tad expensive. What are your views on the price band?
On traditional parameters, valuations are definitely on the higher side but when we see global peers, Zomato offers a better growth prospectus than peers.
The delivery market is largely a two-player market, with Swiggy being the other player. The company has huge pricing power and it is also helping smaller Indian entrepreneurs to grow.
They are also expanding globally with a presence in 23 countries and a lot of value-added products like Hyperpure, dine-out, etc. Both products have a highly scalable model, and valuations are subjective in the tech space.
Also read: Zomato IPO | ‘Don’t see major listing gains as issue already priced 30% above last round of funding’
There is a saying “stock prices are the slaves of earnings”. We know that cash burn is necessary for companies like Zomato to build market share. So, what is the Street discounting?
The Street is discounting expansion into newer cities, lower sales and promotion expenses (discounts), and newer products.
What Zomato or Swiggy is doing they are building a large ecosystem, for larger participation of the ecosystem, where cash burn may be required.
We have seen in the past also in cab aggregator companies globally. They have a huge first-mover advantage and earnings are expected to pick up substantially once cash burn stabilise.
Also read: Zomato IPO to open next week: 10 key things to know about the issue and the company
Do you think the stock can double on the listing day or at least a pop of over 50 percent?
On the basis of current GMP, a 20 percent pop is possible, however with a market cap of Rs 85,000 crore, expected to be part of large indices going forward.
Also read: Here’s how Zomato makes money
How does Zomato stack up against global peers? Do you think it is expensive?
Valuations are subjected to cycle and industry, it is definitely expensive but with a unique proposition and highly scalable model, valuations are on the back burner.
The two biggest risks are eating at home and NRAI (restaurant governing body) launching their own app. This model has done well.
Also read: Done Deal! IPO-bound Zomato invests $ 120 million in Grofers
What are the valuing criteria for companies like Zomato, one of the first unicorns to hit D-Street? How can investors measure the performance of tech-based companies?
Valuing with global peers and growth premium can be criteria, Price to sales can be used to value tech unicorns.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management.
