IPO update: Zomato

Zomato came out with its IPO about 10 weeks ago. Value Research's analysis of the IPO can be found here. This follow-up article focuses on the IPO's performance, post-IPO events, and changes in its valuation since then.

Our analysis of the IPO
Zomato is a pure-play technology platform company that connects customers, restaurant partners, and delivery partners. Zomato is a household name nowadays. However, many still don't know that the company is not just into food delivery. It has a presence over the entire food ecosystem with its B2C service 'Hyperpure,' which provides the restaurant partners with raw food materials. Its customers use the platform to search and discover restaurants, order food delivery, view, and upload photos, and make payments through its app. The company is backed by Info Edge, which is also the owner of Naukri.com.

We gave a score of 15 out of 26 based on our IPO analysis. Our primary concern had been that the company incurred losses in the last three fiscal years and can continue to do so in the future. To grow its business and attract new customers, the company provides discounts to increase customer engagement and expects to continue, which may lead to further losses.

Also, the National Restaurant Association of India (NRAI) plans to launch its foodservice app to take on Zomato and Swiggy. NRAI represents more than 5,00,000 restaurants across the country.

Our rating of the company was based on the following:

• On the 11 business metrics, the company did well on four.
• On the six management-quality related metrics, it did well on five.
• On the eight financial metrics, the company did well on six.
• On the valuation-related metrics, the company scored zero.

Stock performance since listing
The company's IPO was the largest and much-awaited IPO of 2021. Despite a large issue size of Rs 9,375 crore, the IPO was oversubscribed by more than 38 times. The QIB portion was oversubscribed by 51 times, while the non-institutional investors over-subscribed their portion by around 33 times and the retail portion 7.5 times. However, the interesting thing to note was that the employee portion was not even fully subscribed.

Zomato made a stellar debut on the stock exchange listing at a gain of more than 50 per cent. In no time, the company's overall market capitalisation crossed the Rs 1 lakh crore mark on the day of its debut. Ever since, the company's stock price has been on an upward trajectory and currently stands at Rs 140 against its issue price of Rs 76.

Business Performance
Zomato reported robust growth in its first quarterly results post listing for Q1 FY22. Its food delivery segment's gross order value (GOV) grew by 315 per cent YoY compared to the corresponding June quarter last year on the back of lower demand during the initial lockdown period. However, on a quarterly basis, the GOV increased by over 37 per cent to Rs 45.4 billion, and it was the highest ever for the company. As of July 2021, the company had 3.1 lakh delivery partners versus 1.7 lakh delivery partners just three months back in Mar'21.

The reported revenue also grew 217 per cent YoY and 22 per cent QoQ to Rs 844 crore in the first quarter itself. This revenue growth was led by growth in the food delivery vertical as dining-out shrunk on a sequential basis. However, the reported EBITDA margins further decreased to -44.6 per cent because of increasing employee expense and other expenses and shrinking of high-margin dine-out business. Net loss of the company also widened to Rs 360 crore against Rs 100 crore in Q1FY21.

What to do now?
Online food delivery is a highly underpenetrated market in India as compared to other developed and developing countries. Thus, increasing smartphone and internet penetration will increase demand for online food ordering services, which can benefit the company's growth.

The company's revenue has grown at a great pace in the last five years at a CAGR of 60 per cent, from Rs 206 crore in FY16 to Rs 2,126 crore in FY21. However, the company has never posted profits since its inception. Due to regular losses, the company's fundamentals look a little weak compared to its expensive valuation. Its stock trades at a P/B of 6.5 times which might look overvalued but is less than other internationally listed peer Doordash, which trades at a valuation of 14.1.

Given that there is no clear pathway to profits, only investors with a high risk appetite and those who can research startups thoroughly and are willing to bear the risk involved should consider it. Others should simply avoid it.

Disclaimer: This analysis is not meant to serve as a recommendation. Do your own research before investing in the company. If you are interested in our stock recommendations, please visit www.valueresearchstocks.com