Is the euphoria of Zomato’s IPO lasting? – The New Indian Express
There is a big buzz surrounding Zomato’s IPO. The online food delivery service has caught the attention of investors and the Rs 9,375 crore offer has been over-subscribed 38.24 times. Large qualified institutional investors bid nearly 52 times; and even the smallest retail segment was 7.45 times oversubscribed. The stock listed on Friday opened at Rs 116, a 53% premium over the issue price of Rs 76.
There is euphoria due to its size – after all, Zomato is the second-largest IPO after the sale of Coal India’s stake in October 2010. Does that now herald another “digital turn” “as Paytm, Flipkart and Ola line up to debut on the stock market. The obvious trigger for “success” is the nature of the business – the immense possibilities of delivering food online at a time when consumer options have been frozen by the Covid-19 pandemic.
Zomato’s IPO is based on a blind belief in the “digital” future. The company has never hidden the fact that it has never made a profit; in fact, he said in his offering document that he would continue to invest and therefore losses may continue to increase. Zomato’s pre-IPO financial data is no fault. Revenue fell 23% to Rs 1,994 crore for fiscal 2021 and it made a loss of Rs 812 crore.
Yet investors believe that with the scale it has reached, Zomato is on the road to success. It is present in 525 cities and 23 countries outside India; it has 1.7 lakh of delivery partners, it has an active 1.5 lakh list of restaurants that it delivers from and its app is used by 41.5 million customers. And the great thing Zomato has going for it is its monopoly; or duopoly to be precise, with Swiggy.
But believing in the “digital” future is not enough. The question is: are these business formats sustainable over the long term? There is little data to support the current optimism in the market except for questionable predictions by investment bankers that food delivery could turn into an $ 8 billion business in 2-3 years. But what if the pandemic goes away and malls and restaurants open? Or what if people are fed up with ordering?
Example of the case of Policybazaar.com. Here is a business model that seeks to make money by providing clients with a hub of comparative insurance products. It claims to process 25% of all term policies on behalf of insurers; but break it down, and it’s a pretty niche business. He also made a loss of Rs 213 crore and Rs 218 crore, two consecutive years. Still, Policybazaar is in the market with an IPO to raise Rs 6,500 crore; and he’s looking for a valuation of $ 4 billion to $ 5 billion.
The game is in the Offer to Sell (OFS), in which the company raises funds by allowing existing investors to opt out. It almost looks like a Ponzi scheme. A group of investors comes out, to be replaced by another, and another at each round of financing. Every set makes money whether the business is in the dark or not. The problem is this: the last set of suction cups could get stuck.
In addition to this, you will need to know more about it.
As more tech start-ups line up to raise funds in the market, it seems investors haven’t learned from some of the big overvaluation flops of the past. WeWork, an office rental startup with an international footprint and a vibrant coworking business plan, quickly fell out of favor when investors realized it was overvalued. From an initial valuation of $ 47 billion in August 2019, it halved its target and ultimately failed to secure support for its IPO, even at $ 12 billion. Burdened with debt, the company sacked CEO Adam Neumann and delayed its IPO indefinitely.
Uber’s initial public offering and listing in the United States followed an almost identical path, except that it did not collapse. The incredible business model of carpooling, which saves people from having to own a car, has been presented by Morgan Stanley and Goldman Sachs at an astronomical valuation of $ 120 billion. He didn’t hold on. Nine months later, in May 2019, when Uber was finally listed, it had fallen to about half that figure, to $ 45, with a valuation of around $ 69 billion.
Today, Uber is hovering around $ 47, which means big investors like SoftBank of Japan, which pushed Uber and other tech stocks, have had a hard landing.
Some tech companies have learned the hard way and some have come out on top. DoorDash, the US version of Zomato, also had the right timing, listing last December when people were still staying inside. Starting at an impressive $ 38 billion valuation, in 6 months its valuation has appreciated 35% to $ 92 billion; but its stock did not perform very well, behind its listing price of $ 189.
The takeaways are that investment bankers have a hard time valuing loss-making tech startups, and the right valuation is often a guess. Growth at all costs, as we have also learned, cannot be a sustainable model. For start-ups, a brilliant idea must not only be a viable business, but it must also be a business that is constantly adapting to face competition and support growth. A lot of big ideas like Uber are currently struggling due to their inability to keep up with competition from new players.
In India, it will be interesting to see Zomato’s trajectory and the rest will take.