Zomato's grey market premium is on a steady decline; here's why

Zomato shares were trading at a premium of 10 per cent in the grey market

The much awaited initial public offer (IPO) by online food delivery giant Zomato is struggling to capture interest in the grey market ahead of its share sale offer, with the premium for the company's shares on a decline.

The IPO which is priced in the range of Rs 72-76 per share looks to raise Rs 9,000 crore when it kicks off on Wednesday, July 14. "While the primary market is abuzz, the grey market premium has come off steadily to Rs 7.75 per share or 10 per cent in early Tuesday trade. As on Monday, the scrip was changing hands at a premium of 13 per cent and last week at a premium of 25 per cent," an analyst with a local brokerage said. READ HERE

Market consensus shows that the IPO is likely to float easily as there is demand for new-age tech giants like Zomato but there is no denying that the Street is divided on valuation metrics, hence the dent in grey market premium.

Umesh Paliwal, co-founder at InvestorZone said that the grey market premium moves in one direction when everyone is bullish. "Take Clean Science Technology and GR Infraprojects for instance. They both have a very stable business model plus the future of the company in the next five years is defined. But in the case of Zomato, investors are split on whether to invest in the IPO amid valuations and profitability concerns," Paliwal said.

Clean Science Technology and GR Infraprojects IPOs closed on Friday, with strong subscriptions of 93 times and 103 times, respectively. Currently, they are trading at a premium of 52 and 63 per cent in the grey market.

On conventional parameters, Zomato's valuation at 25x FY21 EV/sales versus 10x for global peers and 12x for Indian QSRs look expensive, with the path to profitability also unclear, cautioned Himanshu Nayyar, Lead Analyst – Institutional Equities at Yes Securities.

Secondly, while the company's unit economics is getting better, its aggressive investment plans could delay profitability. The EBITDA losses have reduced substantially over FY18-21, with revenue growing at 62 per cent CAGR and contribution margin turning positive. But maintaining that trajectory might be difficult given the need for continued investments and higher marketing costs and discounts, Nayyar added. He, in line with Street view, advised investors to subscribe for listing gains. TRACK BROKERAGE VIEWS ON THE IPO HERE

Furthermore, while Swiggy and Zomato have first mover advantage, emerging competition from the likes of Amazon, NRAI and aggregators like DotPe and Thrive should be closely watched as any big-pocketed players can ruin business prospects.

"If one wants to apply for the IPO, then here 'invest and forget story' will not work like it is for blue chips where we are assured of their performance. We need to continuously track the company and see if it is on path to profitability. A lot of startups are going to hit the primary market this year like Paytm, Naykaa, Policybazaar, Delhivery. So, this IPO will set a benchmark for the upcoming IPOs too," said Manan Doshi, co-founder at UnlistedArena.com.