Zomato IPO more suitable for institutional investors, don#39;t anticipate much listing gains, says Rajnath Yadav of Choice Broking

In terms of revenue and restaurants listed on its platform, Zomato is a small player as compared to the global players, says Yadav.

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The much-awaited initial public offering (IPO) of food-delivery platform Zomato opened for subscription on July 14 to enthusiastic response from retail investors even as debate rages over its valuations.

Rajnath Yadav, Research Analyst, Choice Broking, thinks that Zomato IPO is at a significant premium to the peer average and is unlikely to see much listing gains.

In an interview to Moneycontrol’s Sunil Shankar Matkar, Yadav says the IPO is more suitable for institutional investors who have the capacity to hold it for decades and also for the select class of retail & HNI investors. Edited excerpts:

Zomato IPO opened for subscription on July 14, with a price band of Rs 72-76 per share. Do you think the issue is reasonably priced?

At a higher price band of Rs 76, Zomato is demanding a price-to-sales (P/S) multiple of 29.9x, which is at premium to the global peer average. Moreover, in the recent past, the company has executed couple of small sized private placements, which were at significant discount to the issue price. Thus the issue seems to be overpriced.

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Do you expect the Zomato to list at more than 50 percent premium?

Our IPO research doesn’t only factor in the listing gains, (but also) the outlook in the medium term. Having said that, the issue is at significant premium to the peer average, we don’t anticipate much listing gains. More importantly, we feel that this IPO is more suitable for institutional investors who have the capacity to hold it for decades and also for the select class of retail and HNI investors.

Also read: Zomato IPO opens today: 10 key things to know about the issue and the company

What are the driving factors for Zomato? Where does it stand in comparison to peers?

Currently, they are operating in a dupoly market with most likely equal market share. Both Zomato and Swiggy are loss-making.

Considering the low penetration of restaurant business in the domestic market, there is a huge untapped market for growth for aggregators like Zomato. Another driver will be the business diversifications ie their entry into groceries, which again is a high growth market but currently at a nascent stage.

Also read: Zomato IPO anchor book: 186 funds participate, 74 MF schemes pick up stake. Check full list here

Do you think it is a multibagger story?

This can be a multibagger story, assuming they maintain or further improve their unit economics. We don’t foresee this happening in the medium term, as both Zomato and Swiggy are flushed with capital to grab the incremental market share. Discount-led business growth will continue for these aggregators. Also, we are anticipating a fall in the gross order value once the individual socialisation norms normalise to pre-Covid times.

There is also a regulatory concern. The National Restaurant Association of India has filled their concerns to the Competition Commission of India, alleging anti-competitive practices by these food delivery aggregators.

Will the Zomato IPO see a stellar subscription and what could be subscription levels?

The IPO will get subscribed but not expecting any stellar subscriptions levels.

Zomato has consistently posted losses but revenue has been growing every year. Do you expect the company to turn profitable in the coming years?

Historically, Zomato had a discount-led business expansion. Because of competitive pressure, it may continue with this business model and thus we are not anticipating any profitability in the medium term.

In terms of revenue and restaurants listed on its platform, Zomato is a small player as compared to the global players. However, its take rate is highest. Further, it is operating in an under penetrated market, so growth can be exponential.

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?

The valuation methodology of internet-based companies is still evolving, so pinpointing any one valuation multiple would be incorrect. With most of the startups currently operating in red, we have considered P/S as the reliable valuation metric for benchmarking.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.