A large untapped population, changing food habits of the new generation and more women joining the workforce augur well for the company in the long term, says Gandhi
Sunil Shankar Matkar
July 15, 2021 / 10:38 AM IST
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The initial public offering (IPO) of food-delivery platform Zomato has had a flying start, with the issue getting fully subscribed on the opening day itself even though analysts are divided on its valuations and where the company is headed.
Anita Gandhi, Whole Time Director, Arihant Capital Markets, thinks the Gurugram-based company has the ability to grow and gain market share. With a large part of the population still untapped, changing food habits of the new generation and more women joining the workforce, the company can do well in long term, she says.
A growing scale will lead to lower transaction costs and stablise fixed costs, Gandhi says in an interview to Moneycontrol’s Sunil Shankar Matkar. 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?
Zomato is an all-in-one food-service platform and is a consolidated format of global leaders like Door Dash. Considering, the duopoly (Zomato and Swiggy) food-delivery market in India with limited disruptions and the first startup in the food space to be listed on the bourses, the interest amongst the investors about the IPO is quite high. The company does not have any listed peers on Indian bourses. Zomato is a loss-making company and is having a negative EPS. Hence, price-to-earnings (P/E) ratio is not relevant for concluding on the valuation of the company. At the upper price band of Rs 76, the issue is offered at Mcap/sales of 29.9x which looks a bit stretched. However, considering huge scalability in business, the potential opportunity of growth in the market size as compared to the other nations and the fact that India is on the cusp of offering higher employment potential for women, we recommend investors subscribe to this IPO for the long-term perspective.
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Do you expect the listing premium to be more than 50 percent?
Investors are actively involving in IPOs in the last few months. Investors are ready to pay more premium to get the stock, as recently many issues were very heavily oversubscribed due to a higher number of applications. Last two IPOs were subscribed more than 90 times. We are expecting listing to be reasonably good, however, it also depends on the overall market conditions at the time of listing.
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What are the factors that will drive Zomato? How does it stack up against its peers?
Zomato has the ability to grow the market size and gain market share. Growing scale will lead to the lower transaction cost. Management feels business can be contribution positive over the longer term. The benefit of scale will start showing as the fixed cost would remain stable. Food remains core, however, the company will keep doing pilots in new segments like grocery (recent investment in Grofers). The market is a duopoly in India in FY21.
Also read: Zomato IPO Update | Trading premium halves in grey market as issue opens for subscription
In the last 15 years, many companies exited or were sold to another company. Tasty Khana started in 2007 and closed in 2014. FoodPanda started in 2012 and was later acquired by Ola in 2017 and it was shut down in 2019. Tiny Owl started in 2014 and closed in 2016. Scootsy started in 2014 and was later acquired by Swiggy. Uber Eats started in 2017 and was acquired by Zomato in 2020. Olacafe started in 2015 and closed in 2016. Currently, two major players— Zomato and Swiggy—are leading the industry and other players and other chain restaurants and unorganised players are having a very less or negligible market share. Technological improvement, network effect, ad promotions and other cost optimisation led the growth for Zomato.
Do you think it is a multibagger story?
After IPO, the company will have Rs 15,000 crore cash, which will be used for investment in new customer acquisition, organic and inorganic growth, investment in tech and infra and general corporate purposes. Zomato crossed major headwinds over a decade, while other companies shut shop. Considering the density of population and changing habits of the new generation with more women coming in the working class, the company has the potential to do well in the longer term. The success of the company will depend upon its ability in acquiring new customers, growing market size and gaining market share.
Also read: Zomato IPO opens: 10 key things to know about the issue and the company
Will the Zomato IPO see a stellar subscription and what could be the subscription levels
In the last six months, IPO have subscribed average 55 times, however considering the large size of the issue and bit expensive valuations, we are expecting the issue to oversubscribe with reasonably good multiple.
Also read: Zomato IPO opens for subscription today: Should you place an order?
Zomato has consistently posted losses but revenue has been growing every year. Do you expect the company to turn profitable in the coming years?
The company made losses of Rs 1,011 crore, Rs 2,386 crore, Rs 816 crore in FY19, FY20, FY21, respectively. The losses are significantly reduced compared to the previous year. The company majorly reduced advertising and sales promotion expenses as a percentage of sales, the ad and sales promotion expenses came down from 88.4 percent to 24.88 percent from FY19-21. The contribution of Gross Order value (GOV) turned positive from Q1FY21. The management did not provide any guidance about profitability in the coming years. However, the market size is huge and exploring opportunities led the growth for the company.
Globally, six peers are listed and two companies are yielding positive returns and the remaining four are yielding negative returns. The maximum return is 28.13 percent and the maximum drawdown is 20.51 percent as per the stock returns comparisons amongst global peers.
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?
As mentioned earlier there are no other peers in the similar space on the Indian bourses and therefore, we cannot compare its valuations with any other company in the listed space. Zomato is a loss-making company and is valued at the market cap to sales of 29.9x to its FY21 sales of Rs 1,994 crore. The book value was 15.09 and EPS stood at INR -1.52 as on FY21.
The performance of such companies can be measured by the acquisition of new customers, new geographies and raising scale of business, which will lead to cost optimisation and profitability going forward. Going forward, any reduction in ad spend will directly add to the bottomline of the company.
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.
