 "Zomato")
Ant Group-backed Zomato has emerged as the second-most valuable company after Coal India on listing day with a market cap of Rs 98,849 crore.
Coal India, which made its stock market debut in October 2010 after a record Rs 15,200-crore IPO, had a market cap of Rs 2.16 trillion following its trading debut which saw its shares soar 40 per cent.
Meanwhile, DLF and Reliance Power had market cap of Rs 96,246 crore and Rs 89,233 crore at the end of listing day trade.
The valuation at IPO price for Coal India, DLF and Reliance Power was much higher than Rs 60,000 crore sought by the online food delivery company.
On the first day, Zomato has broken into the club of top-50 listed companies in terms of market capitalisation in India. The fast-growing startup is now valued more than established companies such as Tata Motors, Mahindra & Mahindra and Britannia. Interestingly, investors have ascribed near Rs 1-trillion valuation despite the company not being able to generate a single rupee in profit.
Market watchers say large investors are willing to overlook the metrics such as earnings and market-to-sales given Zomato’s growth potential given the low penetration of online food delivery in the country.
In a note, ICICI Securities highlights that the near-term valuations for tech companies are often optically high and misleading. It cites examples of Twitter and Facebook which traded at 90 times and 30 times their sales at IPO valuations or Zoom and Google which traded at 2,000 times and over 200 times price-to-earnings at their issue price.
“‘Near-term’ losses / cash burn are the key reasons for the pessimism of investors around these IPOs. This is largely due to spending targeted at driving customer adoption and branding. Notably, these front-ended investments should create strong moats and drive back-ended benefits in the form of brand recall and network effect for several years to come,” said a note by ICICI Securities. “Profitability and cash flow are great sanity metrics, they are better applied on businesses in steady state such as Infosys, Google, Hindustan Unilever.”
Zomato is the market leader in the domestic food delivery market, which is pegged to explode as the economy revives, people get back to office and more Indians get internet access.
“While Amazon Food remains the wild card, economies of scale will allow the company to generate high operating margins, and the company will continue to reinvest (acquisitions and technology) as it grows. The risk of failure is low, given the company’s post-IPO cash balance and access to capital and its operating risk reflects its exposure to Indian country risk,” said a note by Aswath Damodaran, a professor of finance at NYU Stern School of Business adding that the stock was “too richly priced for me”. His valuation model gave a fair price of Rs 41 per share.
Listing payday for investors
Zomato’s stock market debut has resulted in huge mark-to-market gains for its early backers such as Info Edge, private equity major Sequoia and Jack Ma’s Ant Group. Sanjeev Bikhchandani-led Info Edge currently is the biggest shareholder with a 15.8 per cent stake, which is valued at Rs 15,656 crore. The average acquisition cost for Info Edge works out to just Rs 1.16 per share, as per the disclosure made in Zomato’s offer document. Second-biggest shareholder Ant Group’s stake is valued at Rs 13,959 crore, more than 10 times its investment. Sequoia, known for its bet on interest companies first invested in Zomato in 2013, currently holds 5.1 per cent stake, which is valued at Rs 5,000 crore.
