Seeing the excitement from institutional investors to subscribe to the IPO, the issue is expected to get oversubscribed multiple times.
Sunil Shankar Matkar
July 16, 2021 / 09:12 AM IST
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//$ .each(d.ac,function(i,v) //{ // accStr+=”+v.nm+”; //}); $ .each(d.data,function(i,v) { if(v.flg == ‘0’) { var modalContent = ‘Scheme added to your portfolio.’; var modalStatus = ‘success’; //if error, use ‘error’ $ (‘.mc-modal-content’).text(modalContent); $ (‘.mc-modal-wrap’).css(‘display’,’flex’); $ (‘.mc-modal’).addClass(modalStatus); //$ (‘#acc_sel_port’).html(accStr); //$ (‘#mcpcp_addportfolio .form_field, .form_btn’).removeClass(‘disabled’); //$ (‘#mcpcp_addportfolio .form_field input, .form_field select, .form_btn input’).attr(‘disabled’, false); // //if(call_pg == “2”) //{ // adtxt =’ Scheme added to your portfolio We recommend you add transactional details to evaluate your investment better. x‘; //} //else //{ // adtxt =’ Stock added to your portfolio We recommend you add transactional details to evaluate your investment better. x‘; //} //$ (‘#mcpcp_addprof_info’).css(‘background-color’,’#eeffc8′); //$ (‘#mcpcp_addprof_info’).html(adtxt); //$ (‘#mcpcp_addprof_info’).show(); glbbid=v.id; } }); } }); } else { AFTERLOGINCALLBACK = ‘pcSavePort(‘+param+’, ‘+call_pg+’, ‘+dispId+’)’; commonPopRHS(); /*work_div = 1; typparam = t; typparam1 = n; check_login_pop(1)*/ } } function commonPopRHS(e) { /*var t = ($ (window).height() – $ (“#” + e).height()) / 2 + $ (window).scrollTop(); var n = ($ (window).width() – $ (“#” + e).width()) / 2 + $ (window).scrollLeft(); $ (“#” + e).css({ position: “absolute”, top: t, left: n }); $ (“#lightbox_cb,#” + e).fadeIn(300); $ (“#lightbox_cb”).remove(); $ (“body”).append(”); $ (“#lightbox_cb”).css({ filter: “alpha(opacity=80)” }).fadeIn()*/ $ (“#myframe”).attr(‘src’,’https://accounts.moneycontrol.com/mclogin/?d=2′); $ (“#LoginModal”).modal(); } function overlay(n) { document.getElementById(‘back’).style.width = document.body.clientWidth + “px”; document.getElementById(‘back’).style.height = document.body.clientHeight +”px”; document.getElementById(‘back’).style.display = ‘block’; jQuery.fn.center = function () { this.css(“position”,”absolute”); 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Himanshu Nayyar, Lead Analyst – Institutional Equities at Yes Securities, feels given the nascent state of the business currently, Zomato definitely looks very expensive on conventional valuation parameters as the company is burning cash and is still loss-making.
“We don’t believe that conventional valuation parameters can be used to value such high-growth tech companies given the difficulties in accurately predicting future growth rates,” he told Moneycontrol’s Sunil Shankar Matkar, in an interview.
He said investors should subscribe and exit post the initial euphoria ends.
Edited Excerpts:-
Q: Should one subscribe to Zomato IPO for listing gains or for the long term?
In our view, despite expensive valuations, we expect strong demand for the IPO and post listing as well in the initial few days. Investors who could not get allotment try and buy from the open market. Post the initial euphoria, we will need to track the progress on growth and unit economics, competitive activity and capital allocation strategy to see if the stock could be a good long-term investment. So for now, we believe investors should subscribe and exit post the initial euphoria ends.
Q: Zomato IPO was fully subscribed on day 1 itself. Do you think the issue will get stellar subscription by final day considering healthy response from investors?
Seeing the excitement from institutional investors to subscribe to the IPO, the issue is expected to get oversubscribed multiple times. But given the low grey market premiums prevailing, the oversubscription numbers might not be very high.
Q: What could be the driving factors and risk factors for Zomato going ahead?
Key drivers for stock going forward would be 1) capital allocation plans to utilize the Rs 15,000 crore of cash on books, 2) trends on monthly average users and ordering frequency post the economy opening up, 3) trends in unit economics of the business with discounting and marketing spends expected to increase with company moving to smaller cities and 4) inclusion in global indices like MSCI which will bring in passive institutional money.
Key risk factors would be the strategy of Amazon which has recently entered the space, resistance from NRAI which has created its own delivery app, further cash burn in highly competitive new areas like grocery, dark kitchens and other diversification initiatives and change in regulations which limit the delivery charges or take rates which are on the higher side.
Q: Should one follow the traditional valuation parameters before investing in Zomato like companies? Also what are other valuation parameters that one should consider for tech-based start-ups like Zomato?
Given the nascent state of the business currently, it definitely looks very expensive on conventional valuation parameters as the company is burning cash and remains loss making. We don’t believe that conventional valuation parameters can be used to value such high growth tech companies given the difficulties in accurately predicting future growth rates. We have seen companies try multiple things and pivot the business model towards the ones which are working well which completely changes the future growth and earnings trajectory. So, the only way to value them for now would be prescribe an Enterprise Value multiple to sales or an EV multiple to per unit revenue/EBITDA.
Q: Do you expect Zomato to turn profitable by FY23-FY24, as it has been reporting losses every year?
Very difficult to see if they can turn profitable by FY24 as the path to profitability remains unclear. We expect the company to remain focused on growth via both organic and inorganic means which should delay getting into profits. While unit economics have improved in FY21, it might deteriorate again with competition picking up, consumer mobility increasing and the company entering new markets.
Q: Do you think the issue is expensive on conventional parameters?
The issue is definitely expensive on conventional valuation parameters. It is loss making at EBITDA and PAT level. On EV/revenue basis, it is being valued at 25x FY21 sales versus 10x for global peers and about 12x for domestic quick service restaurant (QSR) companies.
Q: The trading premium in the grey market halved within a week. Do you still expect bumper listing?
Not expecting very significant listing gains but given the strong institutional appetite for the company, won’t be surprised to see some buying frenzy in the initial few days post listing.
Q: Where does Zomato stand in comparison with global peers?
Zomato is still quite small compared to global peers and that means a large growth opportunity. In terms of number of annual orders, Zomato is at 400 million versus 800 million for Door Dash, 600 million for Just Eat and 1,300 million for Delivery Hero. In terms of number of restaurants, Zomato has 160k active delivery restaurants versus 210k for Just Eat, 420k for Door Dash and 620k for Delivery Hero. In terms of number of orders per restaurant per day, Zomato is ahead with 9.2 orders versus 6.8 for Just Eat, 5 for Door Dash and 5.8 for Delivery Hero.
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