Zomato IPO review (Avoid)

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Review By Dilip Davda on July 10, 2021

• Zomato is one of the leading foodservice platforms.
• It has tough competition and the sector is largely fragmented.
• It has been incurring losses from its operations and has piled up losses.
• The IPO pricing is at inflated valuations than estimated by many brokerage houses.
• The offer is costly based on negative earnings and uncertain future prospects.

PREFACE

Zomato has been the talk of the town ever since it filed its DRHP with regulators on April 27, 2021. While DRHP indicated an issue of Rs. 8250 cr. (Rs. 7500 cr. fresh + Rs. 750 cr. OFS), the RHP that was filed on July 06, 2021, surprised one and all as it indicated the issue size of Rs. 9375 cr. (Rs. 9000 cr. fresh equity + Rs. 375 cr. OFS). According to management, following overwhelming response during roadshows and considering the appetite of investors for a larger supply of stock, they increased the size of fresh equity by a permissible 20% limit and is thus trying to milk the cow. With the increased size of fresh equity, they have raised their plans for organic and inorganic growth initiatives from Rs. 5625 cr. to Rs.6750 cr. as well as a kitty for general corpus needs for the residual portion in proportionate higher volume. As we all know, the general corpus fund has many grey areas to spend.

The company has been incurring losses in its operations globally and off late started pruning its international ventures. Seeing a bigger Indian market and opportunity, they are now giving a major thrust to Indian venture. At present India is having a largely fragmented market in the area of Zomato's operations and is full of competition from MNCs as well as local players. This poses a question mark on Zomato's future prospects as it will take a pretty long time to start net surplus after covering the carried forward losses incurred so far. Swiggy and Amazon are the two major competitors for Zomato.

While management assured of customer data protection, we all know that in 2017, its customer data was hacked and over 17 million users were affected.

This being the first mega IPO from a food service aggregator on the India horizon, we have no listed peers to compare with. However, on the global scene, such aggregators are valued at 8 to 9 times their revenues whereas, for Zomato coupled with India perspective, it is valued at 16+ and thus highly overvalued (almost double). Secondly, there are so many 'ifs' and 'buts' for this company's progress going forward. How the company management takes on the huge cash on their book remains at the centre stage. If it is used prudently, then it may become a rewarding bet, otherwise, it can be totally vice-versa.

The company also tried its luck for grocery delivery about one and a half years back and was rolled back after few months, but now again they are trying for their luck in this segment with investment in Grofers. The company's current revenue has a 75% contribution from food delivery services, how long this will continue post-pandemic is a million-dollar question as people moving out for foods will definitely have some impact.

The company's current positive NAV is only due to hefty premiums collected by it for equity placements. According to leading brokerage houses, the market cap of Zomato was pegged at Rs. 39K cr. but with this issue pricing, the company is looking for a market cap of over Rs. 59.5K cr. and is overvalued. The company will have free cash of Rs. 15k cr. in books post this IPO and this might be the only attraction for punters.

Many brokerage houses feel that the pricing of this IPO is at an inflated valuation and hence it has nothing on the table for new investors in the near term.

The well-planned grey market game may lure investors other than QIBs for investing in the hopes of listing gains. No doubt India is a big market, but changed lifestyle post-pandemic raises concern.

ABOUT COMPANY

Zomato Ltd. is, according to RedSeer, one of the leading Food Services platforms in India in terms of the value of food sold, as of March 31, 2021. During Fiscal 2021, 32.1 million average MAU visited its platform in India. As of March 31, 2021, Zomato was present in 525 cities in India, with 389,932 Active Restaurant Listings. Its mobile application is the most downloaded food and drinks application in India in each of the last three fiscal years since Fiscal 2019 to Fiscal 2021 on iOS App Store and Google Play combined, as per App Annie's estimates.

Zomato's technology platform connects customers, restaurant partners and delivery partners, serving their multiple needs. Customers use its platform to search and discover restaurants, read and write customer-generated reviews and view and upload photos, order food delivery, book a table and make payments while dining out at restaurants. On the other hand, the company provides restaurant partners with industry-specific marketing tools which enable them to engage and acquire customers to grow their business while also providing a reliable and efficient last-mile delivery service. Zomato also operates a one-stop procurement solution, Hyperpure, which supplies high-quality ingredients to restaurant partners. Thus the company also provide its delivery partners with transparent and flexible earning opportunities.

While it had a footprint across 23 countries outside India as of March 31, 2021, the company has taken a conscious strategic call to focus only on the Indian market going forward. Given the large market opportunity in India, it believes a focused Zomato will enhance the value for all its stakeholders.

Its operations marked set back in Fiscal 2021 due to the COVID-19 pandemic. Accordingly, the company's financials and key performance indicators for Fiscal 2021 reflect the impact of the pandemic on its operation.

ISSUE DETAILS/CAPITAL HISTORY

To part finance its plans for funding organic and inorganic growth initiatives (Rs. 6750.00 cr.) and general corpus needs, Zomato is coming out with a maiden equity issue worth Rs. 9375.00 cr. It has fixed a price band of Rs. 72 - Rs. 76 per share having a face value (FV) of Re. 1. The issue opens for subscription on July 14, 2021, and will close on July 16, 2021. Minimum application is to be made for 195 shares and in multiples thereon, thereafter. The issue consists of a fresh equity issue worth Rs. 9000.00 cr. and an offer for sale worth Rs. 375.00 cr. At the upper price band of the issue, Zomato will issue totally 1233552730 shares including a fresh equity issue of 1184210625 shares. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 15.72% of the post issue paid-up capital of the company.

Zomato has reserved 6500000 equity shares for its eligible employees. From the residual portion, it has allocated 75% for QIBs, 15% for HNIs and 10% for retail investors.

The Book Running Lead Managers (BRLMs) to this offer are Kotak Mahindra Capital Co. Ltd., Morgan Stanley India Co. Pvt. Ltd., Credit Suisse Securities (India) Pvt. Ltd., BofA Securities India Ltd. and Citigroup Global Markets India Pvt. Ltd. while Link Intime India Pvt. Ltd. is the registrar to the issue.

Having issued initial equity at par, the company has raised further equity in the price range of Rs. 641.00 to Rs. 155690.27 (for FV of Re. 1) between July 2010 and March 2021. It has also issued bonus shares in the ratio of 6699 shares for every 1 share held in April 2021.

The average cost of acquisition of shares by the selling stakeholders is Rs. 1.16 per share.

Post issue, Zomato's current issued and paid-up capital of Rs. 666.10 cr. will stand enhanced to Rs. 784.52 cr. Based on the upper band price of the IPO, the company is looking for a market cap of Rs. 59623.37 cr.

FINANCIAL PERFORMANCE

On the financial performance front, on a consolidated basis, Zomato has posted a total turnover/net profit (Loss) of Rs. 1397.72 cr. / Rs. - (1010.51) cr. (FY19), Rs. 2742.74 cr. / Rs. - (2385.60) cr. (FY20) and Rs. 2118.42 cr. / Rs. - (816.43) cr. (FY21). It has been incurring heavy losses for all these years. FY21 posted lower loss following other activities coupled with the declined top line.

For the last three fiscals, Zomato has (on a consolidated basis) posted negative EPS Rs. - (2.99) and a negative RoNW of - (49.09). The issue is priced at a P/BV of 5.04 based on its NAV of Rs. 15.09 and at a P/BV of 2.91 based on its post-issue NAV of Rs. 26.10 (at the upper price band). Despite heavy operational losses, it has a positive NAV. Thanks to hefty premiums collected on the equity placements that have helped it to post positive book value.

COMPARISON WITH LISTED PEERS

As per offer documents, Zomato has no listed peers to compare with.

DIVIDEND POLICY

The company does not have a formal dividend policy as of the date of this Red Herring Prospectus. Further, it has not declared dividends on the Equity Shares during the current Fiscal and the last three Fiscals. It is expected to follow a prudent dividend policy post listing based on its financial performance and future prospects.

MERCHANT BANKER'S TRACK RECORDS

The five BRLMs associated with the offer have handled 15 issues in the past three fiscals (including the ongoing one) out of which 5 issues closed below the issue price on the listing date.

Zomato IPO FAQs