High valuation of $8 billion makes Zomato's offer less appetising

Competitive intensity, customer acquisition costs likely to delay profitability

The valuations of the country’s first consumer platform, Zomato, to hit the primary market may not yield outsized gains for investors. The leader in the online food aggregator market is raising Rs 9,350 crore to fund its growth plans. 

The company, which has a presence in 525 cities across the country with an average of 6.8 million customers ordering food every month, is being valued at $8 billion, or just under Rs 60,000 crore at the upper end of the price band of Rs 72-76. Most brokerages had initially pegged valuations at $5.5 billion. 

Says Karan Taurani, vice-president, Elara Capital: “At 11 times its FY24 enterprise value to sales, the stock is trading at 40 per cent premium to its peers such as Doordash. Most global players are trading at 4-8 times on that metric. While the premium is justified, given the faster growth rates in India and the scarcity premium, the valuations have fully priced in the prospects and there is little left on the table for investors.”

The reason for the higher valuation is the near duopoly in the aggregator market, 20-25 per cent growth over the next few years, under penetration and large addressable food services market. Online food delivery service providers (at just over $4 billion) account for just 6-8 per cent of this market.

Analysts also highlight multiple risks going ahead. Increased competition in the form of delivery applications by restaurant association, quick service restaurants such as Domino’s and deep pocketed players such as Amazon could dent profitability of Zomato going ahead. While Zomato’s discounts have reduced substantially in financial year 2020-21 (FY21) given the pandemic, the sharply lower commissions charged by Amazon could force the larger players to focus on market share gains. Further, delivery charges which were hiked in FY21 may come down as normalcy returns. While growth is a given, the level of discounting to drive volumes (strong correlation) and the firm’s ability to keep its costs down will decide the return to profitability. On revenues of Rs 1,993 crore, the company posted a loss of Rs 816 crore in FY21.  

However, Vikas Jain of Reliance Securities has given a ‘subscribe’ rating and says investors with at least a two-year horizon can consider the IPO. “Given the low penetration, just two large players in the market, falling advertising costs and company’s focus on the domestic market, growth as well profitability after initial cash burn will improve going ahead,” he says. Advertising costs as a proportion of total income have dipped from 88 per cent in FY18 to 25 per cent in FY21. 

Besides, the cash on the books from the IPO will help the company expand its user base, move into smaller towns, and add to its nearly 400,000 restaurant listings. 

The company is looking at both organic and inorganic expansion. While the former will include customer acquisition costs, strengthening the delivery infrastructure, and improving the technology platform, it is also eyeing acquisitions such as the one it made in online grocery platform Grofers.