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Zomato IPO intends to expand and strengthen restaurant relationships

21 November 20226 mins read by Angel One
Zomato IPO intends to expand and strengthen restaurant relationships
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An Overview – Zomato IPO

Despite the fact that investors believe Zomato’s IPO is pricey, with a price range of Rs. 72 to Rs. 76, it has sparked a lot of interest in the market. This is the first time a food aggregator start-up is going public in India, and it is a company that benefited directly from the pandemic. It’s also a moment when market sentiment is high because the market has been swamped with money from both international and domestic investors, and risk appetite is high as well. As a result, there are numerous grounds to anticipate that the IPO will be successful.

More money for Zomato means more restaurants will be able to use the cloud kitchen concept. Zomato’s initial public offering (IPO) offer amount of Rs. 9,375 crores is up from Rs. 8,250 crores disclosed in April when it filed draft filings with market regulator SEBI.

When compared to the first wave of pandemic, the second wave appears to have a lower impact on businesses. The lockdowns have been a big setback for businesses across the country. Companies like Zomato, on the other hand, have assisted them in generating some demand and money. As a result, investors believe that Zomato’s aspirations to expand through an IPO are a sensible idea.

Further Key Takeaways on Zomato IPO

With this IPO, Zomato will be able to strengthen its partnership with eateries and grow into a number of new cities. As consumers become more accustomed to digitization, the meal delivery industry will continue to expand. Restaurants were forced to close due to the pandemic scenario, however restaurant aggregators such as Zomato and Swiggy allowed them to continue operating and help them survive. With more restaurants moving to a fully ‘delivery only’ strategy, their relationship helped them deepen their ties with the eateries.

Infusions of money for startups like Zomato will enable more eateries to adopt the cloud kitchen model. Additional money would also help Zomato strengthen its technology, expand to more Tier II and III cities in India, and make it easier for restaurant owners to join with them to offer last-mile delivery. This also means more jobs in the delivery arena, and we see a lot of possibility for growth in this space for the pan-India staffing players.

This IPO is particularly significant for Zomato because it would be the first among Indian start-ups to go public. People have turned to online ordering of food and food items instead of offline purchasing, making foodtech one of the few areas that has benefited from the pandemic. Zomato’s timing was also perfect since market sentiments broadly are at an all-time high. IPOs provide companies with the funding they need to pursue expansion and growth, which in turn creates job opportunities.

Investors also believe that there has been a lot of activity in the food delivery market recently, which may pique investors’ attention. Due to merger and acquisition activity, the food delivery company has witnessed a flurry of consolidation, resulting in a stable duopoly with substantial upside potential for the brand, especially as the economy recovers from the pandemic-induced downturn. There is a chance of strong interest in the offering given these relevant circumstances.

Thoughts on Zomato IPO’s overall expansion strategy?

Many think the business expansion strategy is sound because it emphasises backward integration. They will be able to fortify their bonds with their restaurant partners. However, there are doubts about how scalable this strategy is in terms of whatever they’re doing right now and how much money they can make from it. It’s still too early to make a bet on the company and assign it a different valuation. Investors believe it is the food delivery business, which will continue to be the fundamental service and will be highly appreciated.

What does the valuation look like if worldwide benchmarks are used for Zomato IPO?

On a one-year forward basis, worldwide averages range from four to eight times on a sales basis. When you look at Zomato’s sales for the next year, it’s around 11-12 times. It comes with a scarcity premium of about 40% when compared to worldwide rivals. And a large portion of the scarcity premium is justifiable because the industry is underpenetrated and growth rates are significantly faster than in worldwide markets. In metro cities, we can notice an increase in the number of orders. There is potential to increase the number of new users as well as the frequency of orders in Tier II and Tier III cities.

The market structure is one factor that will keep valuations in check. If a large, scalable player enters this industry, it has the potential to be extremely disruptive. Discounting might be increased to retain your present user base. As a result, market structure poses a significant risk.

Profitability is the second factor. Dalal Street will be watching to see how profitable Zomato can be in the next 3-5 years. If one wants to improve frequency in a country like India, where people place a high priority on value, one must offer discounts. As a result, it will be determined whether they can outperform global players in terms of revenue growth and ordering frequency without offering bigger discounts.

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