Why Zomato May Be Looking At IPO Valuation Of At Least $6.4 Billion
Food delivery riders for Zomato Media Pvt. wait to collect orders outside a Rebel Foods Pvt kitchen in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Why Zomato May Be Looking At IPO Valuation Of At Least $6.4 Billion

Zomato is looking to raise Rs 8,250 crore (about $1.1 billion) in its initial public offering, seeking a valuation above Rs 48,000 crore ($6.4 billion) for the Ant Group-backed online food ordering and delivery platform.

The offer will comprise a fresh issue of Rs 7,500 crore ($1 billion) to fund growth and expansion, according to its draft red herring prospectus filed with the Securities and Exchange Board of India. Major investor InfoEdge India Ltd. also plans to sell shares worth Rs 750 crore ($100 million) in the IPO.

Kotak Investment Banking, Morgan Stanley, Credit Suisse, BofA Securities and Citi are the bankers to the offer.

Zomato, the first food-tech unicorn looking to go public, is among a host of tech-driven Indian businesses planning to launch IPOs as the pandemic accelerated digital shift in Asia's third-largest economy.

Valuation

Zomato raised its last equity round at $5.4 billion in February. In practical terms that will serve as a valuation floor. In the IPO the shares will be priced higher. But, assuming that the food delivery startup sells shares at the same price in the IPO, it will be valued at $6.4 billion. That’s the minimum valuation it will seek.

A price lower than that is possible but highly unlikely as it would lower the overall valuation for existing investors and send a negative signal to potential investors.

In its DRHP, Zomato IPO size is pegged at Rs 8,250 crore (1.1 billion). It may also undertake a pre-IPO private placement of up to Rs 1,500 crore ($200 million).

Regulatory guidelines require a company to offer at least 10% of post-issue paid-up equity capital in an IPO.

Assuming the Rs 8,250 crore ($1.1 billion) offer constitutes that 10%, the maximum valuation the company will get is Rs 82,500 crore ($11 billion).

If the pre-IPO placement takes place, the IPO size will stand reduced by that amount giving the company a top valuation of 9 billion dollars (Rs 67,500 crore).

So, expect a valuation of between $6.4 billion to $11 billion.

Use Of Proceeds

The Gurugram-based firm backed by Jack Ma’s Ant Group aims to use Rs 5,625 crore of the proceeds to fund its organic and inorganic growth initiatives over the next five financial years. Zomato said 40% of the proceeds will be invested in three core areas: delivery infrastructure, technology infrastructure, and customer and user acquisition.

"As we have done in the past, in the future we may adapt and further expand our platforms to cater to other services and business offerings as well, in line with our strategic initiatives and priorities," the firm said the prospectus.

Zomato reported a revenue of Rs 1,301 crore for the nine months ended December, with a loss of Rs 682 crore. That's because its expenses at Rs 1,723 crore are higher than its total income.

  • Employee benefit expense account for 40% of the total income.
  • Other expenses including rent, advertisement and sales promotion, delivery cost accounted for 69% of its total income.

Zomato expects its costs to increase over time alongside losses given significant growth investments.

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