Zomato looks expensive when we compare it with the global peers on an EV/Sales basis. Globally, online food delivery players trade at an average EV/Sales of 10x while Zomato trades at 44x FY21 EV/Sales, says Poddar
Food delivery platform Zomato listed on the stock exchanges on July 23 in a low-key event at its office
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Investors who did not get shares of Zomato on allotment can enter at current levels or at dips for a 15-20 percent upside, Sneha Poddar, AVP, Research, Broking & Distribution, Motilal Oswal Financial Services Ltd said in an interview with Moneycontrol’s Kshitij Anand. Edited excerpts:
Q) What should investors do post Zomato listing? Can new investors enter at current levels?
A) Zomato, India’s leading online food delivery company, listed strongly on the exchanges on Friday with a 53 percent premium at Rs 116 per share and rallied towards an intraday high of Rs 138 before settling around Rs 125 levels.
Despite the large size of IPO and rich valuations, the company had seen a robust subscription of 38x as there is a lot of fancy for such unique listings.
It can continue to do well as Zomato is the first of its kind listing in the food delivery business and operates in a duopoly market where there is a huge untapped opportunity.
Its mobile application is the most downloaded food and drinks app in each of the last 3 years. It operates in a highly underpenetrated market. The total food consumption in India — only 8-9% is from restaurants, of which only 8% is online food delivery.
Thus, Zomato with first-mover advantage is placed in a sweet spot as the online food delivery market is at the cusp of evolution. It has consistently gained market share over the last four years to become the category leader in India in terms of GOV (Gross Order Value).
It enjoys a couple of moats and with the economies of scale started playing out, the losses have started reducing substantially. Thus we are positive about the stock and believe that it can do well going ahead as well.
Though valuations seem expensive, valuing such early-stage businesses on a plain vanilla financial matrix might not give the right picture and may look distorted.
Thus investors with risk appetite who missed out on getting in allotment can buy at current levels and at dips for decent 15-20% upside from here.
Q) What does the Zomato listing mean for Info Edge investors? Zomato’s market cap has already surpassed Rs 100,000 crore mark on listing day.
A) Info Edge, one of the biggest promoters of Zomato, sold a 3.3 percent stake in Zomato for Rs 375 crore via IPO and currently holds a 15.23 percent stake.
The total stake of 18.5 percent before IPO was valued at Rs 11,000 crore. But now, after the bumper listing of Zomato, the remaining stake is worth Rs15000 crore.
Thus the per share contribution of Zomato in Infoedge SOTP valuation will go up substantially.
Q) How does Zomato fare on price to sales basis among global peers?
A) Zomato looks expensive when we compare it with the global peers on EV/Sales basis. Globally, online food delivery players trade at an average EV/Sales of 10x while Zomato trades at 44x FY21 EV/Sales.
However, valuing such early-stage business on a plain vanilla financial matrix might not give the right picture and may look distorted.
The majority of the global players have attained a decent business size and have turned EBITDA positive, while Zomato is at a very nascent stage and is making losses even at the EBITDA level.
We believe that it has the potential to disrupt the traditional market and set on a path of highly accelerated growth. Though the journey will be gradual and the initial pain point might be high, but once Zomato achieves economies of scales, then the return potential could be tremendous (getting reflected in reduced EBITDA losses).
It has already created a good brand image and recall and is penetrating fast in the online food delivery business. It has created an entry barrier by massively building upon its network and reach.
Indian market offers huge potential and Zomato with first-mover advantage is placed in a sweet spot. If one has to compare, then we can use P/BV for comparison, where Zomato seems reasonably valued at 5.7x FY21 P/BV vs global peers average of 10.5x.
Q) Is strong listing gains driving retail investors to the IPO party? What are your views?
A) In the last year, a lot of new retail investors have flung into the market, getting attracted by the strong grey market premium and thus potential listing gains.
Further, the recent IPOs so far have been good offers that came after a long time. With rising interest in midcaps and smallcaps, investors have been on the lookout for new ideas to invest in and these IPOs provided them the same.
In addition, with interest rates being very low, and the grey market premium running high, it provided a lucrative opportunity for retail investors to participate in these IPOs.
Further, given the bullish structure of the market, Mid & smallcap firms are gaining a lot of interest and traction. With the reopening of the economy, the investor’s appetite is improving for new and differentiated offerings.
Thus good participation is being seen in the majority of these IPOs based on their business model, financials as well as valuations.
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.
