Zomato’s IPO opens next week. GMP, expectations and what to expect
The highly anticipated IPO of online food delivery and restaurant discovery platform Zomato is knocking on doors for the delivery of its initial public offering (IPO) on Dalal Street, as it is expected to open for subscription on July 14th. It has set the offer price for its public offer at ₹72-76 per share.
The size of the offer will probably be as much as ₹9,375 crore, making it the second largest IPO since SBI Cards and Payment Services’ ₹Offer 10,340 crore last year in March. The issue, which closed on July 16, consists of an offer to sell ₹375 crore by the company’s first investor, Info Edge, and a new issue worth ₹9,000 crores. The stock is expected to go public on July 27.
IPO Details –
- Issue period: July 14, 2021 – July 16, 2021
- IPO size: ₹93.75 billion
- Price band: ₹72 to 76 per share
- Lot of the offer: Minimum lot of 195 shares, and in multiples of 195 thereafter
- Quota size: For the retail category, the quota is set at 10% of the net supply while for qualified institutional buyers (QIB) at 75% and the quota for non-institutional investors (NII) at 15%.
- Kotak Mahindra Capital, Morgan Stanley India and Credit Suisse Securities (India) are the Global Coordinators and Senior Book Managers (BRLM).
- Bank of America (BofA) Securities and Citigroup Global Markets India will manage the issue while Link Intime India is the registrar of the issue.
- GMP: Zomato’s gray market premium is trading at around 13-15, around 20% above the high end of the IPO price range of ₹76, according to market watchers. The Gray Market is an unofficial platform, in which trading begins after the announcement of the IPO price range until the IPO shares are listed. Registration is likely by July 27.
“The hunger for such a technology-driven IPO is very high, which will ensure the digestion of such IPOs. These companies will not be valued using traditional valuation methods. Although these companies show losses, they are still valued more than some traditional giants, ”said Abhay Doshi, founder of UnlistedArena.com.
“The ability to reach any customer’s door is a great force that can open doors to new business avenues. However, such disruptive businesses are a double-edged sword, as the entry of any big-budget player can pose a serious threat to the business. For a longer term view, we need to continuously monitor the performance, acquisitions, expansions of the business and whether the business is heading towards profitability on an ongoing basis, ”added Doshi.
The consolidated loss of the company was reduced to ₹816 crore in FY21 compared to the loss of ₹2,385 crore the previous year. The company said its losses are expected to continue given “significant investments in the growth of its business.” Zomato’s Red Herring Prospectus (RHP) points to a continued recovery in key operational metrics in March 2021, analysts observed.
While the IPO might seem costly based on FY21 numbers, Jyoti Roy, Angel Broking’s DVP-Equity Strategist, believes FY21 was an outlier as business was significantly affected by due to the first wave of Covid and the lockdowns that followed. However, given the strong growth prospects, high barriers to entry, and the duopoly nature of the food delivery business in India, he believes Zomato will have a premium over its global peers (like Meituan, Doordash, Delivery Hero) and, therefore, the brokerage is positive on the prospects for future growth of the company.
Many analysts expect the IPO to do well given investor interest in its offering in the mainstream tech space.
Those at Jefferies India in a note said that while there are many questions in the minds of investors regarding medium-term growth, profitability and the use of cash, the FOMO factor is expected to keep the level of high excitement, depending on investor interactions. The direction of the analysts meeting seemed optimistic, he said. “At the absolute cash consumption rate of FY20, Zomato’s post-IPO cash balance is expected to be sufficient for 6-7 years and could even be up to 10 years if combustion levels are below l ‘exercise 20, “he said. Separately, the brokerage believes that high-growth internet stocks like Zomato can cause traditional stocks, including FMCG and retail, to devalue over time.
In Edelweiss’ opinion, the main risk for Zomato is the execution vis-à-vis Swiggy, unfavorable regulations and the competitive intensity impacting the economy of the unit. He said that while growth remains strong, valuation is certainly not cheap. “Global peers are trading at 2-12 times the selling price, but Zomato offers much stronger growth,” noted Edelweiss.
The initial sale of Zomato shares could propel the 13-year-old food delivery company into the ranks of India’s 100 Most Valuable Companies.
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