Is the Zomato IPO a lifetime opportunity or should one wait for the listing and then buy into Zomato?
Zomato is an excellent company. They are doing a great job. This is one of the first companies from the digital ecosystem which is going public. But having said that, there are multiple concerns and I do not recommend investors buying at the IPO or pick up immediately on listing. Let the dust settle down and there will be better opportunities of buying Zomato in the coming months, not right now.
Fundamentally the problem is with valuation, nothing else. The kind of valuation they are expecting is much higher than the global peers. They are asking for closer to 11 times sales based on the figures now and globally it is 6 to 7 times sales. Also while it is a duopoly today between Swiggy and Zomato, Amazon is already present in a few parts and there is nothing stopping them from rolling out pan-India. We also believe that at the margins they are earning today with a profit per order of around 20 bucks, they have reached a state where the scope for going up further is very limited.
The restaurant association is already up in arms over the kind of share they have to give Zomato and Swiggy. So things are not great as far as the margin front is concerned. Of course, there is a significant opportunity of expanding the business and doing multiple other things on the back of the money they are raising but we will have to see how these things evolve. So there is absolutely no rush. It is a great opportunity. It increases the depth of Indian capital market, paves the way for other unicorns to come, but do not subscribe if you are a retail investor at this stage.
In terms of Q1, FMCG is bound to report an escalation because of the raw material input cost pressure. Having said that, most of these costs were passed on to the customers in a calibrated manner. Could we face the heat on FMCG in the next few quarters as well?
It is an evolving scenario. The input cost inflation is real. Even the prices of components which are critical for many companies like palm oil have shot up. Across the board, there has been inflation, starting with fuel cost which increases the transportation cost. Overall, it is an evolving scenario. It will be very difficult to comment on the future as far as the impact of inflation on their FMCG margins but as things stand today, if you are talking about Q1 very specifically, the impact of cost inflation will be limited because it really started from towards the middle of the first quarter and to an extent they had some bit of cushion against price increases in certain categories.
So, I would not be too worried about the Q1 margin for FMCG companies in general, but going forward we will have to wait and watch this space. Inflation is very much real and we will have to see how things get under control in the near future. One indication will be the monsoon. If the monsoon spread and the quantum is decent, then there will be a propensity for inflation to start coming down in a post monsoon scenario.
Where else are we likely to see pressure on margins because of the commodity cost pressures this particular quarter?
We will see that pretty much in many areas, particularly the companies which are using crude oil or derivatives thereof. Obviously, the crude oil prices have not done anything good for them and they have some stocks which were at prior levels but during the quarter, whatever they have purchased would be at a higher cost and not all costs have been passed on. Thus there will be some margin pressure.
If one has to single out a few sectors, I will be carefully watching the margin scenario for the paint companies because definitely they will get impacted. We will have to see how they have managed to withstand this cost pressure. We will also have to watch the tyre segment and in fact the entire automobile pack. There are multiple factors affecting the automobile sector, the biggest one being the chip shortage which
and others have talked about. But assuming that gets restricted to the higher end or the luxury segment of the market, we will have to factor in the steel and other input cost inflation as far as their margins are concerned.
Also, for the automobile companies, the quarter has not been great. The May and June numbers have not been extraordinary. They have been subdued on the back of localised lockdowns. So we will be carefully watching paints, automobiles, tyres and related companies as there is bound to be pressure on these companies.
