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Info Edge reduces OFS size in Zomato IPO by 50%

05 August 20226 mins read by Angel One
Info Edge reduces OFS size in Zomato IPO by 50%
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Zomato’s Shares Slash

Info Edge, one of Zomato’s major owners, has reduced the offer for sale in Zomato’s IPO by half, bringing the total amount of the IPO down. The company, which is owned by Sanjeev Bikhchandani, announced on Sunday that its board has amended the company’s offer for sale of Zomato shares to Rs. 375 crores. The original objective was to sell Rs. 750 crores worth of shares.

The cut in size indicates that Info Edge is confident in the company’s future and wants to keep more of the company it bought for a low price. Many analysts and foreign investors are likewise optimistic about the situation. Zomato’s much-anticipated initial public offering is set to take place later this month. The date, on the other hand, remains unclear. The entire offer size, excluding pre-IPO allotment, is expected to be around Rs. 8,000 crores.

The stock is trading at Rs. 80 a share in the grey market, or the unofficial market for unlisted shares, about 15% more than the projected IPO price of Rs. 70. Zomato’s shares were sold at Rs. 55-60 in the most recent round of investment.

If traders’ predictions are correct and Zomato offers its shares for Rs. 70, Info Edge will profit 60 times its initial stake. According to the DRHP, the business led by Sanjeev Bikhchandani purchased around 18.55 percent of the company at an average cost of Rs. 1.16 per share.

An Overview of Zomato IPO

Zomato, a food delivery company that began as an online restaurant finder, is planning to seek $1.1 billion in its initial public offering (IPO) later this year, allegedly at a $8 billion valuation. Many people are questioning whether the Gurugram-based company deserves such a high valuation given its loss-making operations.

Given the good commercial success in the past and the potential for even larger growth in the future, the Indian financial services company Edelweiss has valued Zomato at $8.1 billion (Rs. 58,051 crores). The stated price is computed at a 49 percent premium to Zomato’s most recent fundraising round, which valued the company at $5.4 billion in February 2021.

However, these valuations are based solely on the storylines, and the company will need to pull its socks up if it wants to stay afloat in the public market. Zomato’s growth has been rather consistent so far, but the food-tech business would have to pull a rabbit out of its hat to please the public market.

Intense Competition

Zomato’s value is partly dependent on its ability to maintain and strengthen its market leadership in India, where rival Swiggy is not far behind. Zomato may have gotten a head start in the food category, but Swiggy made a number of smart initiatives to give the Gurugram-based firm a run for its money.

Swiggy was completely focused on grabbing the Indian market, while Zomato was busy extending its position across 23 international regions. As a result of mounting losses, Zomato had to halt operations in nine countries by 2016, whereas Swiggy had closed three fundraising rounds and surpassed one million downloads in India.

Aside from Swiggy’s forthcoming rivals, Zomato will face competition from new entrants such as Amazon. Zomato may need to discover more appealing methods to keep people interested without sacrificing unit economics, which will be a difficult feat.

Why is Zomato planning an initial public offering in the midst of a pandemic?

While the epidemic has had a significant impact on the services industry, notably the hospitality sector, consumer internet companies such as Zomato have seen a boost in sales since the initial shutdown last year.

Furthermore, the first nine months of the fiscal year 2020-21 demonstrate an improvement in Zomato’s business unit economics, with commissions and delivery charges increasing compared to 2019-20, and discounts decreasing significantly.

Zomato is forecast to break even in FY23, with operational revenue of $1.4 billion

The success of InfoEdge’s portfolio firms is also examined in Edelweiss’ report on the company’s performance in fiscal year 2021. By the financial year 2023, Zomato is estimated to report operating revenue (commissions on deliveries) of $1.4 billion (Rs. 10,554.8 crores), about five times greater than the $350 million reported in FY20.

In addition, by the same time frame, Zomato is expected to be profitable in terms of EBITDA and FCF. EBITDA refers to a company’s earnings before interest, taxes, depreciation, and amortisation, whereas FCF refers to the company’s free cash flow after capital and operational expenses.

However, this may be a bit of a risky strategy. Zomato is expected to reach EBITDA breakeven (cost = expense before tax) by FY23, according to Goldman Sachs, the global investment bank that is also handling the company’s IPO.

By 2025, Zomato expects to deliver 130 million orders per month

Zomato, which was founded in 2010 by Deepinder Goyal and Pankaj Chaddah, now has a presence on every continent except Antarctica, thanks to acquisitions and subsidiaries.

According to Edelweiss, the food tech industry’s monthly order rate is likely to increase by 30% in the next four to five years. This means that Zomato, which currently serves around 30 million meals every month, may be providing 130 million orders by 2025.

Wrapping Up

Given its widespread popularity, Zomato’s IPO is without a doubt one of the most anticipated in the Indian market. Keeping up with the fluctuating market, however, is not easy. In its IPO, Zomato’s US-based competitor DoorDash was valued at 17 times revenue. Zomato’s current valuation of $5.4 billion would be lowered by a similar multiple.

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