Zomato IPO: What Brokerages Have To Say

A Zomato food courier places cartons of food into a delivery bag in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Zomato IPO: What Brokerages Have To Say

Brokerages recommend investors to subscribe to the initial public offering of Zomato Ltd., expecting the company to benefit from a strong brand name, scope of further expanding in an under-penetrated food delivery market in India, and growing smartphone adoption to aid online ordering, among others.

The Gurugram-based online food delivery platform aims to raise Rs 9,375 crore by selling shares at Rs 72-76 apiece, according to its red herring prospectus. The IPO comprises a fresh issue worth Rs 9,000 crore and a Rs 375-crore offer-for-sale by Info-Edge.

Zomato eyes a valuation of up to $8 billion in the three-day public offering opening on July 14.

Brokerages also cited certain risks such as further losses, increase in costs over time, and heightened competition from Amazon, cloud kitchens, among others.

Here's what brokerages have to say about Zomato IPO...

ICICI direct Research

  • Recommends subscribe.

  • Food service market in India vastly under-penetrated.

  • Addressable food service market in India to grow to Rs 7.7 lakh crore by 2025.

  • 68% of new customers were acquired organically by Zomato in FY21.

  • Opportunities to leverage capabilities into expanding to other related business exist.

  • Higher scale of operations reduced ad spends as a percentage of revenue leading to improved unit economics.

  • Evolving favourable macroeconomics, changing demographic profile, rising adoption of tech infrastructure to offer strong growth potential.

  • Rs 7.7 lakh crore ($110 billion) opportunity in next five years in food consumption market.

  • Zomato has grown from a food discovery platform to a food service platform over last 12 years.

  • End-to-end food services approach a unique positive feature for the company.

  • Strong network effects driven by unique content increasing stickiness and loyalty of both customers and restaurant partners.

  • Consistently gained market share over the last four years to become the category leader in the food delivery market in terms of gross order value.

Key Risks

  • Cost increases over time and losses due to further investments to grow the business.

  • Competition from Amazon, DotPe, IRAI, cloud kitchen firms (Rebel Foods) and quick service restaurants.

  • Zomato is yet to turn profitable.

IIFL Securities

  • Recommend subscribe.

  • Firm on the cusp of reaching profitability and value creation driven by 5x growth in revenues.

  • Firm on the path of achieving 15% operating profitability by FY25.

  • Profitability to be driven by improved market structures for two large players, faster adoption of food delivery and improved unit cost economics.

  • Steady-state profitability (15%+ Ebitda margin) could be two-three years away.

  • Zomato is probably the only scaled-up app that has offerings to match Yelp, DoorDash and OpenTable.

  • Firm metamorphosing into a food-tech super app through its B2B business, Hyperpure and potential foray into B2C grocery through Grofers.

  • Threat from a third, well-funded player in food delivery market remains low.

  • Significant under-penetration and the duopoly in the market to support growth for the next five years.

Kotak Securities

  • Not rated.

  • Collection and curation of all structured content, usage of feet-on-street approach, tech focus to aid cost efficiency.

  • Unit economics of food delivery business has improved consistently.

  • Food consumption and services market since under-penetrated.

  • Focus on content to attract new customers to drive growth.

  • Widespread, efficient on-demand hyperlocal delivery network augur well for sustained growth.

  • Plans to roll out a grocery delivery marketplace and focus on machine learning likely to offer higher personalisation and new experiences to its customers.

  • Strong recovery since the sharp decline in Q1FY21 with gross order value growing in second, third and fourth quarters of the fiscal indicative of sustainability of business.

  • Delivered consistent market share gains in a competitive food delivery space.

KRChoksey Research

  • Recommends subscribe for listing gains only

  • Food service market underpenetrated and is a duopoly

  • Rapid urbanization, favourable demographics, rising disposable income, improved lifestyle and changing consumption habits are key growth drivers for the sector

  • Immense potential for food delivery segment to grow in the next few years

  • Consistent market share gain in food delivery business a key positive feature

  • Strong network effects, content focus, on time delivery, service quality and improving unit economics to drive growth prospects.

  • Technology adoption, product-first approach to aid growth

Key Risks

  • Believe Zomato is very richly valued given the status of the company yet to make any profit.

  • Despite improving unit economics for FY21 period, Zomata continues to be loss-making.

  • Food delivery industry may not be able to sustain rapid growth witnessed in the past

  • Competition from peers to get more intense as new opportunities open up in the food service market

Motilal Oswal

  • Recommends subscribe for listing gains.

  • Strong brand name & recall, and first-mover advantage across India.

  • Scope for further penetration into a highly unpenetrated and duopoly market.

  • Strong growth opportunities emerging as food services market in India is poised to grow at 9% CAGR over calendar year 2019-2015.

  • Strong consumer brand equity with widespread network.

  • Unit economics turning profitable as Ebitda losses decrease with the scale up in the business.

  • Zomato at a sweet spot as online food delivery market is at the cusp of evolution.

  • Investors with high risk appetite can subscribe for listing gains given the fancy for unique and first-of-its kind listing in food delivery business.

Key Risks

  • Prediction of growth trajectory tricky at this juncture.

  • Valuation expensive at 25xFY21 EV/sales compared to average of 9.6x for global peers and 11.6x for Indian quick service restaurants.

  • Company has incurred substantial losses and may continue to incur losses in the future too as the business is still at a nascent stage.

  • Company to require significant investments towards growing the business.

  • Any deviation or failure in maintaining strong relationship with network partners or brand equity to impact business growth.

  • While online food service industry remained a duopoly at present, large players with deep pocket could enter as the industry matured.

  • Low cost of switching between offerings could have an adverse impact on operations.

Prabhudas Lilladher

  • Recommends subscribe on the IPO with long-term gains.

  • Expects premium valuations to sustain as online businesses in India are at the cusp of rapid growth in the coming years.

  • Zomato will be a loss-making company for next two-three years at least.

  • Company valued at 2.2xFY23 EV/gross order value at upper end of the price band.

  • Growth in internet and smartphone penetration likely to boost online ordering.

  • Formidable delivery ecosystem, creation of multipronged revenue streams to drive growth.

  • Zomato managed to increase its commission from Rs 43.6 to Rs 62.8 per order and turned contribution positive despite lesser orders in FY21.

  • Low food services penetration to provide huge headroom for growth.

  • Technology focus and expertise in logistics to provide strong long term growth opportunity.

  • Richly curated content on the platform aiding significant organic addition of new customers.

  • Expansion into new geographies, diversification plans and hyperpure segment offer growth opportunities.

Key Risks

  • Zomato has incurred heavy losses and is likely to continue to incur losses due to heavy marketing spends.

  • Inability to cultivate a habit for ordering food online in Indian market that has always favoured home cooked food likely to impact Zomato’s long term growth plans.

  • Risks from competition persist. For instance, entry of Amazon in food delivery business could impact Zomato’s operations.

  • Ability to sustain the currently high take rates of 20-25% likely to become difficult.

Religare Broking

  • May consider subscribing for the listing gains.

  • Scope for growth as food service industry is highly under-penetrated in India.

  • Food services in India to gain share from unorganized market.

  • Growth in food services industry to be driven by changing consumer behavior.

  • Consistent market share gains over last four years indicative of growth prospects.

  • Strong brand name, recall value, presence across cities and investment plans into new businesses augur well for Zomato.

Key Risks

  • Low entry barriers in the industry implies high competition among the players in the sector.

  • Zomato continuing to make financial losses a key concern.

Ventura Securities

  • Recommends subscribe on Zomato IPO.

  • Long-term constructive on the fortunes of Zomato.

  • Industry structure likely to remain a duopoly of Zomato and Swiggy.

  • Moats of network effects, branding, last mile delivery, user and geographical reach to lead to the domination of the duopoly.

  • Huge latent opportunity visible in India’s online food delivery market.

  • Rapid urbanization and changing demographics to aid higher penetration in online food delivery market.

  • Expects Zomato’s revenue to grow at a CAGR of 64.7% to Rs 8.910 crore by FY24 from Rs 1,994 crore in FY21.

  • FDS metrics, take rates expected to improve, while discounting is expected to diminish on the back of improved penetration, onboarding of new cities beyond 525, foray into adjacent verticals of nutraceuticals and groceries, app ordering convenience and consumer addiction.

  • IPO proceeds to improve cash levels to Rs 15,000 crore and serve as currency for M&A investments in tech and customer acquisitions and general corporate purposes.

Key Risks

  • Valuation of 5.1x FY24 EV/sales may appear optically demanding.

  • Company continues to bleed at the Ebitda and PAT level.

  • Uncertainty due to rise in Covid cases and partial lockdown to adversely impact operations of the food delivery business.

  • Operating profitability sacrificed for achieving rapid growth.

  • Efforts to raise funds and diluting equity to cover the losses do not guarantee future revenue growth and profitability.

  • Competition from global food delivery players with deep pockets could lead to price wars in online food delivery business.

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