Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Capital Markets

<ul>
<li>The subscription period for the <a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOM IN)</a> IPO ended last Friday (16<sup>th</sup> July 2021) with books covered around 38.25x, mostly at the top end of the offer range of INR 72.0-76.0 per share.</li>
<li>The Indian IPO market is a bit different from other developed markets as there were several previous IPOs (like SBI Cards) without notable listing gains despite around 20.0-50.0x oversubscription.</li>
<li>We think Zomato needed significantly more subscriptions to guarantee a substantial listing gain as the three IPOs that popped over 100% on day one during the last two years (Burger King India, Indigo Paints, and Happiest Minds Technologies) were oversubscribed over 100.0x.</li>
<li>Moreover, the “<a target="_blank">Employees Reservation Portion</a>” of the offer (6.5m shares) was undersubscribed (0.62x), indicating that the 3,755 people who know the ins and outs of the business are less enthusiastic about Zomato’s offer than the retail and institutional investors, even with a 13.0-18.0% premium on the grey market.</li>
</ul>


The subscription period for the Zomato (ZOM IN) IPO ended last Friday (16th July 2021) with books covered around 38.25x, mostly at the top end of the offer range of INR 72.0-76.0 per share.
The Indian IPO market is a bit different from other developed markets as there were several previous IPOs (like SBI Cards) without notable listing gains despite around 20.0-50.0x oversubscription.
We think Zomato needed significantly more subscriptions to guarantee a substantial listing gain as the three IPOs that popped over 100% on day one during the last two years (Burger King India, Indigo Paints, and Happiest Minds Technologies) were oversubscribed over 100.0x.
Moreover, the “Employees Reservation Portion” of the offer (6.5m shares) was undersubscribed (0.62x), indicating that the 3,755 people who know the ins and outs of the business are less enthusiastic about Zomato’s offer than the retail and institutional investors, even with a 13.0-18.0% premium on the grey market.


Zomato IPO: Oversubscribed, But We Reckon Listing Gains Could Be Towards the Low Side

Asia Consumer Research, Investory

Devi Subhakesan

Asia Consumer Research

ASIA CONSUMER: INSIGHTS AND INVESTMENT IDEAS

Investory

Investory is a Singapore-based boutique independent equity research firm founded in January 2017 with a primary focus on consumption themes across Asia-Pacific.

We aim to generate investible ideas based on consumption trends and outlook. We screen our ideas on several parameters - product potential, long-term growth and management commitment being the most critical.  We follow a fundamental analysis approach in our stock selection process and are not restricted by market cap.

We aspire to grow into a leading source of unbiased research, free of conflict of interest, for investors yearning for independent and disciplined analysis. 

We also undertake bespoke research mandates to support our Institutional clients’ investment needs.

Our team comprises of professionals with extensive experience in the Asian equity markets, in areas ranging from research, servicing institutional clients and investment management.

<p>Zomato's IPO has attracted robust investor interest with anchor institutional investors lapping up 45% of the issue already (<em>shares</em> locked up<em> for 30 days from the day of allotment)</em>. As interest in this high-profile, big-ticket IPO mount ahead of the book closure on Friday, July 16th, <strong>we present 5-year projections for <a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOM IN)</a>'s revenues and earnings based on industry growth estimates and assumptions</strong>. We find the growth outlook for Zomato's food delivery business attractive but sober relative to the IPO's premium valuations; food delivery's potential need for funds isn't significant either. Investor expectations on Zomato expanding into other related/unrelated businesses by effectively deploying part of its IPO proceeds may be driving the bullish sentiment. </p><p><strong>Zomato's projected financials. What is different about our approach and assumptions?</strong> We have adopted a top-down approach to project Zomato's food delivery revenues, deriving it from estimates for the overall market for foodservice and online food delivery. On the operational front, we believe more stimulus will be needed to drive demand growth in the near term as COVID-led circumstances normalize. Hence expect higher discounts and lesser ability to pass on delivery charges leading to higher cash spend in FY22. <strong>However, the IPO proceeds seem significantly higher than the potential cash needs of food delivery operations; Zomato may have plans to expand into other businesses.</strong></p><p>Detailed revenue and operating income projections, as well as key assumptions, for Zomato's food delivery business, are in the report below.</p><p>In our earlier report <a href="https://www.smartkarma.com/insights/zomato-ipo-floating-high-above-sector-reality-not-a-linear-play-on-india-s-rising-ecomm-user-base" target="_blank" data-smartkarma-citation="insights:54087" rel="noopener">Zomato IPO: Floating High Above Sector Reality. Not a Linear Play on India's Rising EComm User Base</a> we had discussed why we believe India's online food delivery players like Zomato is unlikely to witness a steep growth trajectory like those in developed markets. </p>

Zomato's IPO has attracted robust investor interest with anchor institutional investors lapping up 45% of the issue already (shares locked up for 30 days from the day of allotment). As interest in this high-profile, big-ticket IPO mount ahead of the book closure on Friday, July 16th, we present 5-year projections for Zomato (ZOM IN)'s revenues and earnings based on industry growth estimates and assumptions. We find the growth outlook for Zomato's food delivery business attractive but sober relative to the IPO's premium valuations; food delivery's potential need for funds isn't significant either. Investor expectations on Zomato expanding into other related/unrelated businesses by effectively deploying part of its IPO proceeds may be driving the bullish sentiment. Zomato's projected financials. What is different about our approach and assumptions? We have adopted a top-down approach to project Zomato's food delivery revenues, deriving it from estimates for the overall market for foodservice and online food delivery. On the operational front, we believe more stimulus will be needed to drive demand growth in the near term as COVID-led circumstances normalize. Hence expect higher discounts and lesser ability to pass on delivery charges leading to higher cash spend in FY22. However, the IPO proceeds seem significantly higher than the potential cash needs of food delivery operations; Zomato may have plans to expand into other businesses.Detailed revenue and operating income projections, as well as key assumptions, for Zomato's food delivery business, are in the report below.In our earlier report Zomato IPO: Floating High Above Sector Reality. Not a Linear Play on India's Rising EComm User Base we had discussed why we believe India's online food delivery players like Zomato is unlikely to witness a steep growth trajectory like those in developed markets. 

Zomato: Bullish IPO Outlook Vs Sober Financials. Value Lies in the Views of the Investor

<p>We previously examined <a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOM IN)</a> and expressed our concerns regarding the company’s unit cost dynamics mentioning that the FY21 operating loss is a sign that Zomato is incapable of generating profits even from its most loyal customers who stuck with the company during the hardest days of COVID-19.</p><p>The offer period begins tomorrow (will continue till 16<sup>th</sup> July 2021) at a price range of INR 72.0-76.0 per share, which implies a market cap range of INR 569.6-596.2bn.</p>

We previously examined Zomato (ZOM IN) and expressed our concerns regarding the company’s unit cost dynamics mentioning that the FY21 operating loss is a sign that Zomato is incapable of generating profits even from its most loyal customers who stuck with the company during the hardest days of COVID-19.The offer period begins tomorrow (will continue till 16th July 2021) at a price range of INR 72.0-76.0 per share, which implies a market cap range of INR 569.6-596.2bn.

Zomato IPO Valuation: Making Losses In Most Favorable Circumstances

<p>Here is a list of questions that Investors may pose to Zomato's management to understand and analyze this young company's growth potential and dynamics better, before assessing its investment worthiness at the proposed IPO valuations.</p><p>As discussed in our earlier report <a href="https://www.smartkarma.com/insights/zomato-ipo-floating-high-above-sector-reality-not-a-linear-play-on-india-s-rising-ecomm-user-base" target="_blank" data-smartkarma-citation="insights:54087" rel="noopener">Zomato IPO: Floating High Above Sector Reality. Not a Linear Play on India's Rising EComm User Base</a> market euphoria and street bullishness on the proposed IPO is high and seem to be backed by expectations of strong revenue growth as India's eCommerce economy gathers strength. We reiterate our view that only a fraction of India's online shoppers will have access, need, and ability to afford a primarily urban and highly discretionary service as online food delivery. </p>

Here is a list of questions that Investors may pose to Zomato's management to understand and analyze this young company's growth potential and dynamics better, before assessing its investment worthiness at the proposed IPO valuations.As discussed in our earlier report Zomato IPO: Floating High Above Sector Reality. Not a Linear Play on India's Rising EComm User Base market euphoria and street bullishness on the proposed IPO is high and seem to be backed by expectations of strong revenue growth as India's eCommerce economy gathers strength. We reiterate our view that only a fraction of India's online shoppers will have access, need, and ability to afford a primarily urban and highly discretionary service as online food delivery. 

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

<div><p><a href="https://www.smartkarma.com/entities/zomato-media-pvt" target="_blank" data-smartkarma-citation="entities:28820:1" rel="noopener">Zomato (ZOM IN)</a> is a leading food delivery platform in India. Zomato has two core business-to-customer (B2C) offerings which are Food delivery and Dining-out. It also has a business-to-business (B2B) offering called Hyperpure and Zomato Pro, the customer loyalty program which encompasses both food delivery and dining-out. </p></div><div><p>Zomato will launch its IPO on 14 July at an IPO price range of Rs72-76 per share. The IPO will raise up to Rs93.75 billion ($1.3 billion) with a primary/secondary split of 96%/4%. The selling shareholder is <a href="https://www.smartkarma.com/entities/info-edge-india-ltd" target="_blank" data-smartkarma-citation="entities:14461:1" rel="noopener">Info Edge India (INFOE IN)</a>. </p></div><div>
<p>In <a href="https://www.smartkarma.com/insights/zomato-ipo-initiation-emerging-appetites" target="_blank" data-smartkarma-citation="insights:54141" rel="noopener">Zomato IPO Initiation: Emerging Appetites</a>, we stated that that the food delivery market in India is effectively a duopoly between Zomato and Swiggy. Zomato claims to be larger but the key differentiator will be execution to drive growth with positive unit economics. On this front, Zomato has demonstrated a commendable track record. In <a href="https://www.smartkarma.com/insights/zomato-ipo-results-point-to-a-favourable-trajectory" target="_blank" data-smartkarma-citation="insights:54220" rel="noopener">Zomato IPO: Results Point to a Favourable Trajectory</a>, we noted that the FY21 results support our view that Zomato has attractive fundamentals. </p>
<div class="content-highlight"><p>Our relative valuation suggests that Zomato is overvalued at the IPO price range for its forecasted growth. Our base-case DCF valuation is Rs62.84 per share, which is 15% below the mid-point of the IPO price range. Consequently, while we like the fundamentals, we think that the IPO price range is unattractive and are inclined to remain on the sidelines. </p></div>
</div>

Zomato (ZOM IN) is a leading food delivery platform in India. Zomato has two core business-to-customer (B2C) offerings which are Food delivery and Dining-out. It also has a business-to-business (B2B) offering called Hyperpure and Zomato Pro, the customer loyalty program which encompasses both food delivery and dining-out. Zomato will launch its IPO on 14 July at an IPO price range of Rs72-76 per share. The IPO will raise up to Rs93.75 billion ($1.3 billion) with a primary/secondary split of 96%/4%. The selling shareholder is Info Edge India (INFOE IN). 
In Zomato IPO Initiation: Emerging Appetites, we stated that that the food delivery market in India is effectively a duopoly between Zomato and Swiggy. Zomato claims to be larger but the key differentiator will be execution to drive growth with positive unit economics. On this front, Zomato has demonstrated a commendable track record. In Zomato IPO: Results Point to a Favourable Trajectory, we noted that the FY21 results support our view that Zomato has attractive fundamentals. 
Our relative valuation suggests that Zomato is overvalued at the IPO price range for its forecasted growth. Our base-case DCF valuation is Rs62.84 per share, which is 15% below the mid-point of the IPO price range. Consequently, while we like the fundamentals, we think that the IPO price range is unattractive and are inclined to remain on the sidelines. 


India

Zomato Limited is an online restaurant guide and food ordering platform. The Company offers platform connects customers, restaurant partners and delivery partners to search and discover restaurants, read and write customer generated reviews, order food delivery, book a table, and make payments while dining-out at restaurants. Zomato serves customers worldwide.

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Zomato (ZOMATO IN)

Zomato IPO: Oversubscribed, But We Reckon Listing Gains Could Be Towards the Low Side

In India, 20.0-50.0x subscription rates could be called moderate investor interest and historically those IPOs have had mixed results. It requires...

Oshadhi Kumarasiri

Zomato: Bullish IPO Outlook Vs Sober Financials. Value Lies in the Views of the Investor

Zomato's projected financials for food delivery alone cannot justify the size of fundraising and premium valuations. Robust investor interest may...

Devi Subhakesan

Zomato IPO Valuation: Making Losses In Most Favorable Circumstances

Zomato made an operating loss of INR 4.9bn in FY21, indicating its impotence in generating profits even in the most favorable circumstances....

Oshadhi Kumarasiri

Zomato IPO: 10 Qns To the Management

Questions that will help investors understand and analyze this young company's growth potential and dynamics better before assessing its investment...

Devi Subhakesan

Zomato IPO: Valuation Insights

Our DCF valuation is Rs62.84 per share, 15% below the mid-point of the IPO price range. While we like the fundamentals, the IPO price range is...

Arun George

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