Zomato Makes Stellar Debut On Bourses But Experts Are Divided About Its Valuation
Moneylife Digital Team 23 July 2021
Food delivery aggregator platform Zomato made a superhit, euphoric debut on the bourses on Friday, listing at Rs 116 per share (of face value Re 1) on the NSE, at a 52.63% premium over its issue price of Rs 76 per share. On listing day, Zomato entered the rarefied elite club of listed companies, with a market capitalisation of over Rs 1 lakh crore.
Zomato’s hyped-up initial public offer (IPO) was oversubscribed by over 40 times, mostly by the qualified institutional buyers (QIBs). The company had mobilised Rs 4,196.51 crore from 186 anchor investors a day before its IPO. Given the strong demand for the issue, analysts were expecting the IPO to list at a 25%-30% premium.
Zomato share price soared to hit the upper circuit of Rs 138 shortly after listing on Friday, over 82% from the IPO price, helping investors pocket significant listing gains. The debut rally helped Zomato stock reach a market capitalization of over Rs 1 lakh crore, ironically even beating giant profit making companies like Britannia, Dr Reddy's, Coal India etc. Zomato has closed at Rs 125.85 per share on the BSE at close. 
Zomato’s listing comes at a time when Indian equity markets are witnessing a mad rush for IPOs. The IPO comprised of a fresh issue of equity shares worth Rs 9,000 crore and an offer-for-sale (OFS) worth Rs 375 crore by existing and early investor Info Edge (India).  
Zomato is the first among Indian online food aggregators and one of the first Indian unicorn start-ups to launch an IPO. 
Analysts believe that Zomato has certain clear positives like asset-light scalable business model, expanded target market post the pandemic, first-mover advantage in the food delivery business.
Veteran stock investors and analysts have pointed out that the company has been loss-making and its valuation is not in sync with its performance. The company may continue to make losses in the foreseeable future, it said in its IPO papers. 
Ace investors like Rakesh Jhunjhunwala have said they would not invest in such ventures and they would rather try to make money in some other proven businesses.
On the other hand, drawing parallels, ICICI Securities said similar pessimism was witnessed in the US about 20-25 years ago as in the Indian market today around ‘near-term’ profitability, cash flows and valuations.
It quoted the example of Amazon where US sell side analysts based on reverse discounted cash flow model concluded the US-based company had to sell practically every book on earth for its market cap to be justified.
Amazon got listed in 1997 and since then, its market cap has zoomed 240 times. 
“Under-estimation of the strength of business models, steady state profitability and / or over-estimation of valuations – in case of Google, Apple and Amazon – has been a key regret for Berkshire Hathway (elaborated in annual letters). Post dotcom bust, many US analysts called out multiple false-positive tech bubbles. Nevertheless, the weightage of tech firms in S&P500 increased from mid-single digits during 1990s to 28 per cent today. US tech is now worth more than the entire market cap of Europe,” ICICI Securities said in its note. 
Zomato’s performance would depend on how the company actually delivers and at what pace it reduces losses because now that it is a public company, continued losses will not be taken as well as when it was a privately-owned company.
Post listing, a few analysts urged all investors who received allotment and fresh buyers to ‘Hold’ the stock for bumper returns in the long-term view. 
But most analysts reasoned that the stock is way overpriced and investors should book gains and exit. 
Earlier this week, stock market investor Vijay Kedia had a hilarious take on the current IPO frenzy as he shared a video on Twitter in which a street vendor's 'gol gappas' are marketed as fancy 'waterballs' to raise funds from retail investors.
The video shared by Vikay Kedia is taken from Jaspal Bhatti's popular satirical series - ‘Flop Show’. Jaspal Bhatti plays the role of a chartered accountant in the episode who advises a street vendor to raise funds through an IPO.
"Don't miss IPO of unicorn "PP waterballs", coming soon," Vijay Kedia tweeted while sharing the video.
Harsh Goenka, RPG Enterprises chairman too had highlighted the flawed fundamentals of the upcoming tech IPOs.
Mobile payments and commerce platform Paytm is expected to be next in line and is reportedly planning an IPO of about Rs 166 billion ($2.23 billion).
Mobikwik is also set to take the IPO route although the digital payment company is not a unicorn in the conventional sense of the word, with its valuation placed at $70 million and has filed for an initial public offering (IPO) worth up to Rs1,900 crore earlier this week. PolicyBazaar and Nykaa are also said to be launching their IPOs soon.
 A total of 30 companies have filed IPO papers to raise Rs55,000 crore and at least 10-15 companies have initiated the process of going public.
Chris Wood, the global Head of Equity Strategy at Jefferies, while speaking about the IPO rush said that the listing pipeline of new-age companies in India is a very encouraging sight. He acknowledged that Indian internet companies might do well but are expensive and said that he will not chase them. 
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