Zomato IPO’s valuation raises questions on judging tech platforms

The much-anticipated Zomato IPO subscription, which is all set to open from July 14 to July 16, is creating a buzz and with good reason. The food delivery company’s IPO is sized at Rs 9375 crore and the company is valued in the Rs 60,000 crore or $8 billion range, with experts observing that the valuation may seem a little expensive.

The Zomato Share price band is Rs 72-76. The Zomato IPO news reports show that the company will occupy the 78th place among India’s listed firms with the most market value. The company’s pre-money valuation is around 30 per cent higher than the last round of funding it received, which was $5.4 billion. The valuation of Zomato, say news reports, is equal to the combined market value of all the QSR or quick service restaurants that have been listed. Based on the fiscal year 2021 numbers, the Zomato valuation at a market cap to operating revenue of 29 times and EV (enterprise-value) /operating revenue of 23 times may mean not much cash for investors looking at the long-term.

Valuation metrics for tech platform different

Tech/start-up IPOs or unicorn IPOs are typically not valued according to the conventional methods of valuation. Even though tech/startup IPOs may have posted losses, they are often valued higher than conventional companies. Zomato’s revenues dropped nearly 25 per cent to Rs 1994 crore in FY2021; although it posted losses, the company managed to narrow its losses from Rs 2,363 crore in FY20 to Rs 812 crore in FY2021. Typically, Internet companies are judged by looking at a five-year period instead of just a single year. Most tech companies are valued on the basis of revenues because they don’t tend to make profits in the first five or so years. Also tech firms like Zomato tend to have a certain amount of cash burn.

With these factors in view, if the valuation of a company is looked at from a five-year perspective, the present valuation, according to some experts, is that it is not over 50 per cent or 8.5 CAGR, which doesn’t mean a high valuation. Analysts also note that while the Zomato initial offer may look like it’s expensive purely on the numbers of the fiscal year 2021, the year can be seen as a standout one, because businesses were affected to a large extent because of the first wave of the pandemic and the subsequent lockdowns.

Also, another factor that investors may need to look at is the pace of growth of the company, its revenue expansion and the number of orders. One of the metrics that needs to be considered is the average order value (AOV); for Zomato, the AOV for the March quarter was around Rs 395 compared to Rs 287 for the same month a year ago. Average order value is the number of customers the food order is placed and the price of the said food in restaurants. The company’s gross order value of delivery was at $1.3 billion in FY21 when compared to the $1.5 billion in FY20.

Foodtech segment: opportunity for growth

Data from Redseer suggests that the food services segment is a $65-billion market for India, and is growing at 9 per cent a year. The market is expected to hit $110 billion, come 2025. The online delivery sub category has only 6-7 per cent of this bigger market and there is plenty of scope for online food delivery platforms to explore and grow. According to a Nomura note in July, the foodtech market has the potential to touch a market value of $18.5 billion by FY30.

Because unicorns and big tech startups have suddenly begun to look at going public, with Zomato in the spotlight, analysts have begun to look at metrics beyond profitability for such startups when it comes to judging their valuations. The standards for judging a startup or tech IPO’s valuation may not be the same as a conventional company’s. Tech companies that are looking to go public may not always show profitability in the first year or so because of significant cash burn and investments in the early stages. Also, startups are looking to tap into the rise in online delivery users during the pandemic. These online delivery/ordering habits may last beyond the pandemic as well, signaling an opportunity for food tech platforms.

Conclusion

Zomato’s much-anticipated Rs 9,375 crore IPO will hit the markets on July 14. The Zomato IPO price band is between Rs 72-76, according to reports. The Zomato IPO news has generated a lot of buzz over the issue of its valuation, with analysts responding in a mixed manner to the nearly Rs 60,000 crore valuation of the company. Experts observe that traditional methods of judging a company’s valuation may not work with tech/Internet-based companies planning to launch IPOs because their initial cash burn and investments are higher, apart from opportunities for long-term growth and scalability. If you are an investor, the key Zomato IPO dates to remember are the opening date of July 14 and the closing date of July 16.