The companies, like Zomato, who are reporting negative EBITDA but has a strong top-line should be valued at an enterprise value (EV) to sales, which is a globally accepted valuation metric.
Sunil Shankar Matkar
July 16, 2021 / 11:15 AM IST
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“The fresh issue of Rs 9,000 crore will take the total cash pile of Zomato to Rs 15,000 crore, which will give it a major financial advantage to improve its presence in the home delivery segment (food and non-food) and to sustain against higher cash burn,” Vinit Bolinjkar, Head of Research at Ventura Securities told Moneycontrol’s Sunil Shankar Matkar, in an interview.
He feels Zomato will be a long-term compounding story instead of a multibagger story.
“Our optimism is based on the fact that the industry structure is likely to remain a duopoly of Zomato and Swiggy with limited disruptions from the likes of Amazon (unsuccessful global history of last-mile delivery) and weaker offering proposition from direct ordering companies like DotPe and Thrive,” he reasoned.
Edited Excerpts:-
Q: Zomato is currently trading at a premium of 10 percent in the grey market. Do you expect the premium to increase in coming sessions and the listing to be more than 50 percent?
Yes, Zomato is one of the first unicorns hitting D-Street and therefore we are expecting it to list at a significant premium due to
*a)* fledgling nature of the business,
*b)* duopoly market (Zomato & Swiggy),
*c)* immense upside penetration potential,
*d)* humungous untapped online opportunity of the adjacent verticals, and
*e)* scarcity premium.
Investors are well aware of this and hence we believe that the response for this IPO will be substantial, but it would be difficult to quantify the premium percent.
Q: Why did the 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?
The company increased the issue size due to strong positive sentiments from investors due to the obvious reasons mentioned in the earlier answer.
This fresh issue of Rs 9,000 crore will take the total cash pile of the company to Rs 15,000 crore, which will give it a major financial advantage to improve its presence in the home delivery segment (food and non-food) and to sustain against higher cash burn.
Such a unique proposal is very rare in the Indian stock market and the investors are ready to play this risk in expectation of heavy rewards. The company has correctly observed this and increased the fresh issue size to improve its balance sheet strength.
Q: Do you think it is a multibagger story?
It will be a long-term compounding story instead of a multibagger story.
Our optimism is based on the fact that the industry structure is likely to remain a duopoly of Zomato and Swiggy with limited disruptions from the likes of Amazon (unsuccessful global history of last-mile delivery) and weaker offering proposition from direct ordering companies like DotPe and Thrive. This coupled with the moats of network effects, branding, last-mile delivery, customer user behaviour (convenience and addiction) and wide geographical reach, we believe that the duopoly is likely to dominate in the visible future, which would reflect in the performance of Zomato’s stock price after listing.
Q: Will the Zomato IPO see a stellar subscription during July 14-16, and what could be subscription levels?
Yes, we are expecting a stellar subscription during the IPO period of July 14-16. The severity of the lockdown and the fear associated with the pandemic have front ended growth for the new businesses which are primarily platformdriven and online. This digital era is well accepted by the market and therefore we believe that the Zomato IPO will see a stellar subscription. But it would be difficult to quote any number for subscription levels.
Q: Zomato constituently posted loss but revenue has been growing every year. What is your view and do you expect the company to turn profitable in coming years? What is your take on the company in comparison with global peers?
Zomato had been in the investment stage and in order to grow the market share, the company has been sacrificing profitability over growth. We expect Zomato to sustain positive contribution in the coming years and its earnings before interest, tax, depreciation and amortisation (EBITDA) to become positive by FY25. In our opinion, the duopoly of Zomato and Swiggy has firmly been established in the Indian food delivery market. Direct order platforms (DotPe and Thrive) have failed to make a mark in food delivery and Amazon’s global food delivery experience has not been very encouraging.
So we believe that take rates are expected to sustain and average order value (AOV) is expected to go up in high inflationary environment. Plus, operating cost for Zomato is significantly lower compared to global peers due to favourable cost economics of India. So we believe that the topline growth to sustain and operating leverage to kick-in, leading to faster growth in profits once the EBITDA breakeven is achieved in FY25.
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?
The companies, like Zomato, who are reporting negative EBITDA but has a strong top-line should be valued at an enterprise value (EV) to sales, which is a globally accepted valuation metric.
Every tech-based company has specific sector-based performance parameters. In an app-based food delivery business, monthly transaction users, number of orders, AOV, gross order value (GOV) and take rates are the key parameters to measure the performance.
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