The Rs 9,375 crore initial public offering of Zomato opened for subscription on Wednesday and retail investors have made a beeline to invest in the food delivery company.
The price band for the issue has been fixed in the Rs 72-76 range and will be open for subscription till July 16. On the first day itself the retail investor portion was oversubscribed 2.64 times as of 4:35pm, cumulative bid data from stock exchanges showed.
There is a 10 per cent quota for retail investors. Compared with 12,95,58,333 shares on offer for retail individual investors, the number of bids received stood at 34,20,64,905 shares.
The portion reserved for qualified institutional buyers was also almost fully subscribed at 0.98 times, while non-institutional investors portion was subscribed 0.12 times only. The portion reserved for employees was subscribed 0.17 times only. Overall the issue was subscribed 1.04 times as of 4:35 pm on day one.
Zomato’s IPO comprises an offer for sale of Rs 375 crore by Info Edge India, one of the early investors in the company. The fresh issue comprises Rs 9,000 crore, which the company has said will be used for organic and inorganic growth opportunities and general corporate purposes.
This is the first of the technology startups going public in India—and there is currently no listed player in this space. This is driving a big interest among retail investors.
A market, which is a near duopoly with Swiggy and Zomato being the only two large players in the food delivery space, and Zomato’s market leadership are the key advantages the company has. An underpenetrated market also offers huge opportunities to grow in the future.
But, investors also can’t ignore the fact that Zomato is yet to make any profits. As competition increases in the future (Amazon has already started food delivery in Bengaluru and many restaurants are now promoting direct orders too), its expenses will rise as it continues to expand its business and that means profits may still be some time away.
“New restaurants and its existing restaurant partners may choose its competitors if they charge lower commissions, marketing or other fees, if its restaurant partners do not find its marketing and promotional services effective. Such competitive pressures may lead it to maintain or lower its commission rates or maintain or increase its incentives, discounts and promotions to remain competitive,” said Shikher Jain, analyst at stock broker Anand Rathi.
Many analysts have also pointed out that the valuations are expensive; at the upper end of the IPO price band, the offer is valued at almost 29.9 times its FY2021 market cap to sales. Yet, given it has no precedent among listed peers in India and given the tremendous growth potential this sector holds, several analysts advised investors subscribe to the issue, at least for the listing gains.
“Zomato is being listed at a revenue multiple of 27 times its FY21 revenues whereas global peers trade in the range of 3-19 times price to sales. However, the opportunity and scope of further growth is significant for Zomato,” said Meet Jain, an analyst at LKP Securities.
Zomato’s end-to-end food services approach makes it the most unique food services platform globally combining the offerings of platforms such as Yelp, DoorDash and OpenTable in a single mobile app, he added.
Anand Rathi’s Jain also recommended investors subscribe to the Zomato IPO, but from a short-term.
“The company is well poised and it is also placed at a sweet spot as the first-mover advantage in the online food delivery market. Additionally, given the strong network effects, increasing frequency of order, huge scope for growth in tier II and tier III cities and large addressable market, we recommend a subscribe (short term) rating to the IPO,” said Jain.
Sneha Poddar of Motilal Oswal Financial Services had recommended investors “subscribe” to the issue for listing gains. While Poddar also sees Zomato gaining from the first-mover advantage in the online food delivery market that is at the cusp of evolution, she felt predicting the growth trajectory at this juncture will be a little tricky for the next few years.
