Will the FPO fund infusion solve Vodafone Idea’s problems?

Zomato ‘s initial public offering has managed to generate generous investor curiosity. Set to open tomorrow, the buzz surrounding it augurs well for new economy companies. The company aims to raise Rs 9,375-crore public offer comprises fresh issuance of equity shares of Rs 9,000 crore, and an offer for sale of Rs 375 crore by existing selling shareholder Info Edge. The three-day issue opens on July 14 and the bidding will close on July 16 and the price band of the IPO has been fixed at Rs 72-76 per share.

Investors can bid for a minimum of 195 equity shares and in multiples, thereafter, translating to a minimum bidding amount of Rs 14,820 at the higher end of the price band. A retail investor can at max apply for 13 lots or 2535 shares for Rs 1,92,660.

The food delivery giant will utilise its net proceeds from fresh issue for funding organic and inorganic growth initiatives (Rs 6,750 crore); and general corporate purposes.

Anchor book

Ahead of the IPO, the food delivery app aims to raise almost half its issue size of around $560 million from institutional investors at the upper end of the price band of Rs 76 per share, according to a report in Moneycontrol.

Baillie Gifford, BlackRock, Capital Research, CPPIB, GIC, T Rowe Price are some of the top foreign investors in the company’s anchor book. Axis MF, HDFC MF, Birla MF, Nippon, HDFC Life, ICICI Pru Life are some of the domestic top investors, stated the news site.

Zomato declined to comment on this.

Grey market chatter

In the grey market on Tuesday the shares were hovering around Rs 83 implying a premium of Rs 7 or 9%. Grey market premium for the issue has seen a downward trajectory and it has plummeted almost 61% from Rs 18 levels to Rs 7. “This is mostly due to Zomato being the first mover in the space so it’s difficult for the market to ascertain valuations as the company is still posting losses. Also, the size of IPO is too big which may be ensuring enough supply which may also be the reason for falling grey market premium,” said Abhay Doshi, Founder, Unlisted Arena.

Brokerage view

Here is what brokerages have to say about the issue

Angel Broking | Rating: Subscribe

The IPO is being valued at price/sales of 28.6-29.9x FY2021 revenues of Rs 1,993 crore. Post a 23.5% degrowth in revenues in FY2021 due to the Covid-19 pandemic, growth is expected to pick up sharply from FY2022. Moreover, Zomato has been able to reduce its losses in FY2021 despite a degrowth in topline. Angel Broking expects losses to reduce further over next couple of years due to rebound in growth and improving unit economic. Given strong delivery network, high barriers to entry, expected turnaround and significant growth opportunities in tier-II and tier-III cities, we believe that Zomato will command a premium to global peers.

ICICI Securities | Rating: Subscribe

Zomato is yet to turn profitable. However, this new-age digital platform offers strong growth potential, which at present is evolving on the back of favourable macroeconomics, changing demographic profile, rising adoption of tech infrastructure.

LKP Securities | Rating: Subscribe

Zomato is a growth-oriented company focused on increasing its presence further into every part of the country. FY21 revenues fell by 24% to ₹1,993 crores, the number of orders declined by 41% to 239 million, but order value increased by 43% YoY to almost Rs 400. An increase in frequency and number of food delivery by customers due to lockdowns along with lower customer discounts and fees to delivery partners led to a contraction in losses in FY21 to Rs 490 crore (excluding exceptional items) from Rs 2,251 crore in FY20. Zomato’s unit economic cost has seen an improvement in the last four quarters which increased to Rs 20.5 in FY21 from a loss of Rs 30.5 in FY20.

Zomato is being listed at a revenue multiple of 27x its FY21 revenues whereas global peers trade in the range of 3-19x price to sales. However, the opportunity and scope of further growth are significant for Zomato.

Kotak Securities | Rating: Not rated

Zomato is looking to invest in new products, technologies and features for the benefit of its customers. For example, Zomato is in the process of rolling out a grocery delivery marketplace on its platform on a pilot basis. Food services is a competitive market in India comprising food delivery players like Zomato and Swiggy, cloud kitchens like Rebel Foods and branded food services players (including quick-service restaurants like Dominos, McDonald’s and Pizza Hut, among others). Food delivery players also compete with multiple other participants in the food services industry including restaurants that own and operate their own delivery fleets, traditional offline ordering channels, such as take-out offerings and phone-based ordering, local publications, and other media, online and offline.

What should you do?

Despite brokerages having different perspectives on whether to subscribe or not one thing is loud and clear the IPO is expensively priced, as even the brokerages with a subscribe rating has voiced it. The dwindling grey market premium is another area of concern. The company is raising equity at a rapid pace to fund the business which is a cash-guzzling one. The management also is unsure about when they can turn the company profitable. “Our losses will continue, given significant investments expected towards growing our business,” the IPO filing documents said.

Given this one can look at having a wait and watch strategy as the risk-reward is unfavourable. However, if there is some capital to risk one can apply for the IPO and participate in the rising of digital businesses in India.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firms. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing)