Zomato IPO: Invest for listing gains, say analysts

There is a lot of excitement around the Zomato IPO given it's the first large consumer tech company getting listed. The IPO which will close for subscription on Friday has gained a lot of interest given the  uniqueness of the company, large opportunity size and some evidence of scale economies. However, analysts believe the valuations look really expensive.

"While we see strong investor interest despite punchy valuations at 25x FY21 EV/sales given the uniqueness of the business model, the path to profitability is still not clear. While growth potential and a cash rich balance sheet offer immense growth potential, it is difficult to value the stock on conventional parameters," says Himanshu Nayyar, Lead Analyst - Institutional Equities, YES Securities.

Zomato's IPO is India's biggest issue this year. It got subscribed 1.05 times at the end of the first day of IPO. The price band of Zomato IPO is fixed at Rs 72-76 per share of the face value of Rs 1 each, and the company aims to raise Rs 9,375 crore through the offer.

Also read: Zomato IPO to give boost to other tech companies in India: Infosys CEO Salil Parekh

The company has a strong brand in more than 500 cities in the country. The company has consistently been gaining market share in the last four years with strong growth in app downloads, monthly transacting users, restaurant listings and active delivery partners. In addition to the food delivery business (80% of revenue) and dine-in business (15% of revenue), the company is now diversifying into other areas like B2B ingredient supplies (Hyperpure), grocery (investment in Grofers) and nutraceuticals.

While experts give a go ahead for long term investors, they caution short-term investors to skip the issue on valuation concerns.

Also read: Zomato IPO fully subscribed on Day 1, retail portion booked over two times

"The valuations are not on the investors side today, but investors who have a longer-term horizon can consider the moats of the business and growth potential and invest in the company," says Divam Sharma, Co-founder of Green Portfolio, SEBI registered Portfolio Management Services. "Short term investors can skip as immediate valuations are not supportive of the current financials," he adds.

IPO investors who get an allotment, can make a quick flip, say analysts. "We would advise to subscribe for listing gains only and would wait to see multiple legs of the story unfold before coming up with a more nuanced fundamental view," says Nayyar.

Out of Rs 9,375 crore IPO proceeds, Rs 9,000 crore will come to the company out of which Rs 6,750 crore will be utilised for organic and inorganic growth initiatives. According to Yes Securities, key risks going forward would be emerging competition from well-funded groups and NRAI, losses from new investments and diversification initiatives.

Also read: Zomato IPO opens for subscription: Should you bid for India's first food delivery unicorn?