Zomato IPO sails through on first day thanks to strong retail response

NEW DELHI: The Rs 9,375 crore initial public offering of Zomato saw a strong response from investors on Wednesday as the issue sailed through on the first day of bidding.

At 5:30 pm, the issue had attracted bids for 75,64,33,080 shares, which was 1.5 times the issue size of 71,92,33,522 shares.

Data compiled from BSE and NSE suggests that the retail quota was subscribed 2.69 times. The portion reserved for qualified institutional buyers (QIBs) was subscribed 98 per cent. The quotas reserved for non-institutional investors and employees were subscribed 12 per cent and 18 per cent, respectively.

The issue comprises a fresh issuance of shares, aggregating up to Rs 9,000 crore, and an offer for sale of up to Rs 375 crore by Info Edge. It is being sold in the Rs 72-76 price band.

“We believe Zomato will be a loss-making company for next 2-3 years at least and the IPO values the company at 2.2xFY23 EV/GOV at the upper end of the price band. We expect premium valuations to sustain given that online business in India is at the cusp of fast growth in coming years. We recommend a Subscribe rating on the IPO with long-term gains,” Prabhudas Lilladher said.

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Investors can subscribe to the IPO by betting for a lot of 195 shares or in multiples thereof. Retail investors can bid for a maximum of 13 lots at the upper price band. The quota for retail investors in the Zomato IPO is fixed at 10 per cent of the net offer. QIB quota is fixed at 75 per cent, while for NIIs the quota is reserved at 15 per cent.

“Industry delivery percentage to net-revenue stands at 5 per cent. With Zomato’s average order value of Rs 400 (i.e. Rs 20 per delivery), the company is well poised. It is in a sweet spot. It has the first-mover advantage in the online food delivery market,” said Anand Rathi Financial Services.

Many other brokerages are cautiously positive on the issue as Zomato IPO is demanding a trailing 12-month price-to-sales of 29.9 times, which is at a premium over the global peer average, analysts said.

The valuation also appears expensive when seen from 25 times FY21 EV/sales basis, as global peers trade at an average EV/sales of 9.6 times and domestic QSRs at 11.6 times.

Fundraising deals in the food delivery industry over the last 2-3 years also suggests that Zomato, at a $9 billion valuation, is richly valued.

“We feel that this IPO is not for retail investors. But investors with a higher-risk appetite with a long-term investment horizon can apply. We assign a “Subscribe with Caution” rating for the issue,” Choice Broking said, suggesting a cautious stance on the issue.