The much-awaited initial public offering (IPO) of food delivery platform Zomato is here. It’s opening for subscription today, July 14, and will close on July 16.
The price band is Rs 72-76 per share which puts the market cap of the company at around Rs 60,000 crore. When listed, it would rank amongst the top 80 companies in India by market capitalisation.
In the grey market, the shares are creating a lot of buzz trading at around Rs 100 per share.
Zomato will rank higher than some long-established and well-known names, such as Hero MotoCorp, Aurobindo Pharma, Piramal Enterprises, Apollo Hospitals, SAIL, Lupin, Bandhan Bank, etc.
The company is planning to raise Rs 9,375 crore (Rs 375 offer for sale by promoter Info Edge plus fresh issuance of Rs 9,000 crore). This is the first of the consumer internet startups which are going to hit the markets this year.
India’s largest mobile payments company Paytm is also going to hit the markets soon. This IPO is likely to act as the benchmark for the market’s evaluation of such companies in the future.
Making sense of its financials
The pandemic adversely affected the performance of the company in the financial year 2020-21. However the second wave has not impacted its performance.
Overall, the gross orders fell to Rs 9,483 crore in FY21 from Rs 11,220 crore a year earlier.
Revenues declined 23.4% to Rs 1,994 crore.
Losses reduced to Rs 812 crore from Rs 2,363 crore in the previous year due to cost control measures.
Gross orders improved to Rs 3,313 crore in the fourth quarter.
The number of monthly active users fell 23% to 3.2 crore in FY21, down from 4.1 crore a year earlier.
Zomato charged 75% more on delivery and earned 44% more commission in FY21.
Delivery costs fell 12% and it also slashed discounts by 62% per order.
From making a loss of Rs 30.5 per delivery in FY20, it earned Rs 20.5 per delivery in FY21.
Loss making company with no clarity on profits
Zomato is making losses and it remains to be seen whether the market finds justification in its valuations. In an interview, the founders of Zomato said that discounts are core to our business, and its investors are not in a hurry to see profits.
The losses could further increase given its investment in growing its business. “We have expanded and expect to continue to expand substantial financial and other resources on advertising and sales promotion costs to attract customers and restaurant partners to our platform,” the company said in the prospectus.
Shares of companies with similar businesses abroad have done well in the past few years, riding on high growth in revenue and customer numbers though most of them like Zomato are making losses. Profit may not be the correct tool to evaluate new gae, digital, disruptor companies like Zomato.
Amazon made profits after four years in Q1 2001, since listing in May 1997. Tesla made money for the first time last year and that too less than $1 million. Despite this, it is the 8th highest market cap company in the world.
The investors will need to give it a serious thought on what to value more: Profits… or the power (to disrupt, innovate)!
Should you invest?
The retail portion is likely to be substantially oversubscribed given the buzz, track record of IPOs this year and absence of such a paper in individual portfolios. With Rs 2 lakh cap on investment, one would be lucky to be allocated even 1 lot of 195 shares.
While this money would be locked in for around 8 days, refund on July 23 and last day of subscription July 16, the opportunity cost is not significant given the low interest rates. The interest lost is likely to be meagre at less than Rs 200.
One can opt for the IPO for the sheer knowledge it will provide to investors on the likely trajectory of similar consumer Internet companies. The fear of missing out would also weigh heavily on the minds!
Disclaimer: This is not an investment recommendation and readers are expected to do their own research before investing.
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