Food delivery platform Zomato is all set for the launch of its IPO  on July 14. As per the media reports, the IPO issuance has touched Rs 9,375 crore at a price band of Rs 72-76. The IPO will include the sale of shares worth Rs 375 crore by existing investors.

A large part of the proceeds of Rs 6,745 crore, suggests a report, will be used to fund the company’s growth.

Zomato is reportedly eying a valuation of Rs 64,365 cr or $8.7 billion post-money valuation. The face value of each share will be Rs 5. The minimum bid size will be 195 equity shares.

Elara Capital jots its perspective on the same:

Profitability proliferates on Pandemic; revenues still lag

COVID-19 has transfigured Zomato’s many business drivers:

1) Average order value (AOV) soared 39% versus pre-COVID levels, on rising order traffic from premium and high-end restaurants/QSR chains

2) Delivery charges per order rose 70% on higher AOV and rising delivery charges

3) Also, discounts as a percentage of net AOV waned sharply on ebbing consumer dine-in frequency. Together, these led to positive per order contribution margin, which may fizzle out as such trends may reverse once normalcy resumes

Revenues continue to be lower 24% versus pre-COVID levels despite these triggers, as the number of orders is low on: 1) reduced frequency and 2) work from home (WFH). 

Favorable demographics to drive strong double-digit growth

Zomato’s FY22E-24E revenue CAGR should stand at 28% on:

1) rising smartphone penetration

2) growing order frequency in metros and 

3) expansion into tier-2/3 markets to gain new customers

FY21 MAU/MTU waned 23%/36% versus pre-COVID levels, primarily on: 1) lower usage frequency in metros, 2) reverse migration and 3) Work from home. 

Multiple risks should check premium valuations 

Shift to normalcy post COVID may lower AOVs as consumers may want to pay higher to partake in the overall dine-in experience. Delivery charges too may not offer huge growth potential as they are already at ~9% of AOV (steady-state) – Global average 10-12%. Take-rates too are high at ~17%, much more than global average, with capped growth scope. A large entrant is a risk as India market is under-penetrated, attractive for food delivery. These risks may counter-check Zomato’s scarcity premium.

Profit visibility, new business execution – Key monitorables

We have valued Zomato on five parameters:

1) higher growth rate versus global peers

2) justified scarcity premium given very few listed internet plays in India and Zomato’s favorable demographics-led growth

3) duopolistic market (though large entrant overhang always exists)

4) profitability (delayed profit visibility as India is a price-sensitive market and rising frequency needs higher discounting) and 

5) new business model (such model executions – Delivery, grocery etc. – highly fragmented and competitive)

So, the scarcity premium – ~50-60% versus global peers’ valuations – is fair. Global peers’ EV/sales is at 6.5x average of two largest players, Meituan and DoorDash, from China and the US respectively. So, INR 80, seems to be a fair TP basis FY24 EV/Sales multiple. However, as Zomato is a pure digital play, even on a five-year horizon (FY22-26), based on our estimates/above variables, an INR 120 TP, which is 51% higher and translates into 8.4% CAGR over five years, limits the upside potential for investors