Amidst a generally cheery environment for the stock market, it is a moment of glory for the start-up universe. The Zomato IPO opened for subscription on July 14 and closes on Friday. Priced between Rs 72-76 per share, the issue already has a formidable list of anchor investors, 186 of them to be precise – Tiger Global Investment Fund, Blackrock, Fidelity, JPMorgan, Morgan Stanley, to name just a few. Many firsts here as well – first unicorn tech company to be listed on the exchanges. And it certainly won’t be the last. Zomato will be followed by a string of start-ups in India looking to raise public money in a post-pandemic world.
But amidst all the pomp and show, and there has been a lot around this IPO, here are four things to think about before subscribing to the Zomato issue.
1. What’s happening in the industry
Established in 2008, Zomato is the largest online food delivery player in India, with dominant market share at 45% in the delivery and restaurant categories. It is safe to say, there isn’t too much explanation required when you say the word Zomato or ask someone if they have heard of them.
The company also has a first mover advantage, something that, regardless of industries, does place a company in a sweeter spot than their competitors.
The method of working for a food delivery company like Zomato, is basically that more and more restaurants need to use the app to sell food, and more and more consumers need to use the app while ordering food. One feeds the other.
A key competitor at this point is Swiggy, but there are others including the giant Amazon that are looking carefully at this space. It’s also true that right now, compared to global markets like the US or China, there is a lot of scope to grow and expand in India.
2. How does one value Zomato
This is the tricky part. The easy explanation for brokerages and others valuing Zomato seems to be valuing early stage business by a traditional matrix, which may not give the right picture. But then, what will?
With a price band of Rs 72 to Rs 76, Zomato is looking to raise around Rs 9,375 crore. That gives it a market cap of Rs 60,000 crore. Let’s pause here for a second. We are talking about 1.6 Jubilant Foods for the price of one Zomato, or 10 Burger King Indias for the same; in fact, it is higher than all the listed quick service restaurants put together! It is also, on a standard metric of market cap to sales, more expensively priced than most of its global peers.
In fact, for every report that is hailing this as the next best thing after sliced bread, I can say confidently, it would be very tough to justify the price and the valuations Zomato has set out.
3. What are the risks here?
Many! As I mentioned earlier, at this point Zomato enjoys a king’s share of the market but there are several large entities with deep pockets waiting to jump in. Scale is important and it is a race against who corners how much, how fast.
It is also a vicious cycle of providing discounts to push people to order on the app – something restaurants have been fighting. What happens when discounts are removed from the equation, what happens when restaurants refuse to play ball – tricky call.
Also, the hope right now is things scale up fast, so more app users, more traction in the B and C cities. Basically the more the merrier. COVID-19 hit the hospitality business hard, but ordering in was the gainer from that. However, that works for Zomato only if they can keep getting more customers and users. Secondly, in an environment where households are feeling the money pinch, on fuel and edible oils and groceries, will there remain a frenzy to order in like there’s no tomorrow?
Most importantly, snagging customers doesn’t come with cute social media posts. It requires burning money consistently in order to do that. Zomato has had the safety net of venture capital money that has helped – even now in fact, one of the stated aims in the IPO is customer and user acquisition. So Zomato needs to keep cutting losses and keep pumping sales – it is running on two treadmills at the same time.
4. What is the advice on Zomato?
In short, yes perhaps for a flip, no for a keep.
Motilal Oswal says investors with high risk appetite can subscribe for listing gains given this unique and first-of-its-kind listing in the food delivery business. Others flag the long-term risks, especially the fact that it is not easy to chart a growth trajectory at this point. The Zomato IPO has “sex appeal” – it is a new industry, there’s a lot of chatter about it, big names have been part of the venture capital side and will now be anchor investors. But as a retail investor, you have to ask yourself – am I going to get anything, considering the rush to apply? If I do get something, can I really do a big flip and expect to make handsome returns? Remember it never really plays out like that, especially in issues with a lot of investors and a lot of subscriptions. And thirdly, how long am I willing to be patient with this?
The most optimistic estimate of profitability is from Edelweiss in fiscal 2023. But it’s not going to be a zooming profit line and the company will continue to need to spend a lot of money. So, if you’re feeling adventurous, go for it. But remember, don’t order a sandwich and expect to be delivered sushi!