Prabhudas Lilladher IPO report on Zomato
Zomato has transformed the online food delivery segment and has emerged as a market leader with an increase in GOV from Rs13bn in FY18 to Rs94bn in FY21 (Rs112bn in FY20). Zomato has turned contribution positive at Rs20.5/ order (-30.5 in FY20). We believe that the business offers huge scalability given rising penetration of smart phones and just 8-10% consumer penetration than China/USA, a level India would reach in next 5-7 years. We believe that the business has high gross margins of 90%+ and operating leverage from Availability Fee, Advertising, IT Spends and Personnel cost will expand margins once it reaches critical mass in coming few years.
Valuation and Outlook
We believe Zomato will be a loss making company for next 2-3 years at least and the IPO values the company at 2.2xFY23 EV/GOV at upper end of the price band. We expect premium valuations to sustain given that online businesses in India at the cusp of fast growth in coming years. We recommend a SUBSCRIBE rating on the IPO with LT gains.
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