This frenzy to grab a piece of the blooming Indian food technology sector, some market participants believe, could be so intense that Zomato could command valuations of a decacorn ($10 billion or more) by the time its shares start trading on the stock exchanges.
“There’s a distinct possibility of the IPO being priced at higher valuations. The Indian internet space has a lot of promise due to multiple macro factors,” brokerage firm Ambit Capital said in a note.
After its latest fund raising from Tiger Global and few others, Zomato was valued at $5.4 billion, making it one of the highest valued startups in India.
Ambit Capital itself, however, values the company at $7.2 billion, given the long runway for revenue growth ahead and the company’s increasing dominant position in the delivery services market.
“It is now well-placed to find for itself a larger total addressable market, which would extend well beyond the food delivery. The organic market opportunity further supports its case, as the industry structure is a duopoly,” the brokerage firm said.
Ambit Capital is so certain of Zomato’s potential that it values the company at over 11 times two-year forward price-to-sales, over 100 per cent premium to peers such as China’s Meituan and 45 per cent premium to US’ Doordash.
Money managers said Indian investors have been deprived of opportunities to invest in the internet and technology space, which has been witnessing a boom in markets such as the US and China despite being home to some of the biggest tech unicorns in the world.
Such has been the yearning to own technology stocks and participate in what appears to be a once-in-a-generation rally, that domestic mutual funds have launched new fund offers that would exclusively invest in such stocks or exchange-traded funds with exposure to technology stocks.
The recent success of mutual funds like the one from Parag Parikh Advisory Service has been attributed to the fund’s exposure to some of the biggest tech stocks in the US, such as Facebook and Alphabet.
“The power of innovation and technology has been well-documented in markets of China, where massive wealth creation has happened in the technology space. This is natural to induce a FOMO (fear of missing out) factor among asset managers in India,” Ambit Capital said.
Furthermore, the scarcity of options to own a pure-play technology stock in portfolios is also likely to drive Zomato’s valuations.
Foreign investors, who have been waiting to gain exposure to India’s technology sector, have driven valuations of a handful of listed internet platform companies such as Info Edge India and IndiaMART Intermesh to beyond rational justification and are expected to lap up a stock like Zomato.
“Investors will seek to pile on to stories like Zomato because that is where growth is… since there is a scarcity of growth in India to be frank,” said Amit Jeswani, Founder and Chief Investment Officer at Stallion Asset Management.
Jeswani expects Zomato to list at a valuation around $15 billion, but “it will have to grow much faster than it is now to sustain such valuations.”
