Three valuation parameters: price-to-sales, EV-to-sales and recent private deals in unlisted space – compared with peers – suggest there is nothing on the table for small investors, except for listing excitement.
And then, there are historical trends that suggest a few mega IPOs could not deliver listing gains in the past despite all the excitement for one reason or the other. SBI Card, GIC Re, NIA, and ICICI Prudential Life make that list.
Grey market premium for Zomato has also almost halved to Rs 10 from Rs 18-20 on the day of the IPO announcement. Lastly, operating in an almost duopoly market always means higher regulatory risks.
“It’s a bet for high-risk appetite investors,” said one brokerage.
At the higher end of the Rs 72-76 price band, Zomato IPO is demanding a trailing 12-month price-to-sales of 29.9 times, which is at a premium over the global peer average, analysts said.
The valuation also appears expensive when seen from the EV-to-sales ratio of 25 times for FY21, as global peers trade at an average EV/sales of 9.6 times and domestic QSRs at 11.6 times.
Fundraising deals in the food delivery industry over the past 2-3 years also suggest Zomato is richly valued at $9 billion.
“This IPO is not for retail investors. But investors with a higher risk appetite and a long-term investment horizon can apply. We assign a ‘Subscribe with Caution’ rating to the issue,” said Choice Broking, which suggested a cautious stance on the issue.
The brokerage said an asset-light scalable business model, market potential post the Covid pandemic and the first-mover advantage in food delivery business are all positives, but operations in an almost duopoly market can always draw stricter regulatory oversight.
There can never be a surety of listing gains either, even if the IPO is big. In 2018, SBI Card was widely projected to list at a 30-35 per cent premium, but the stock got listed at a 13 per cent discount due to poor market sentiment. Shares of NIA fell 10 per cent on listing day in November 2017. GIC Re got listed at a 6.8 per cent discount to issue price in October 2017. ICICI Prudential Life fell 11 per cent on listing day in September 2106.
Brokerage KR Choksey used two valuation methodologies to gauge the attractiveness of the issue. It found no comfort in the ‘sky-high’ valuation that the IPO is demanding. The brokerage has recommended a ‘subscribe for listing gains only’ rating to the issue.
“We believe Zomato is very richly valued at $9 billion given its status as a company that is yet to make a profit. But as it is the first startup in the Indian Food Aggregator space to be listed on the bourses, the enthusiasm among investors is tremendous,” it said and gave a ‘subscribe’ rating on the issue only or listing gains.
YES Securities said the Covid pandemic has impacted Zomato revenues but improved unit economics, which could be difficult to sustain going forward.
“While clarity is still awaited on the use of IPO proceeds for M&A, it could be a combination of foray into grocery, dark kitchens, nutraceuticals. While we see strong investor interest given the uniqueness of the business model, the path to profitability is not clear,” it said.
Zomato narrowed its losses to Rs 816.42 crore in FY21 from Rs 2,386 crore in FY20. It reported a Rs 1,010 crore loss for FY19.
In the IPO papers filed with markets regulator Sebi, Zomato said it expects costs to increase over time and “losses will continue, given the significant investments it expects to make to grow its business.”
