Zomato IPO was priced at 26 times its annual revenue, Uber’s 8 times and Just Eat’s 10 times, possibly making the former the world’s most expensive issue of its kind.
The writer is CEO, TrisysThe Zomato initial public offering (IPO) was not as much about the prospects of an internet food delivery platform as much as it was about how people like you and I appraise ‘risk’. I am no one to adjudicate in khuley-aam about the irrational behaviour of crowds (except to vote with my earned rupee). Instead, in this column, I present two sides of every dimension of the issue, and leave it to you to decide your risk quotient.
For: The issue is historic for startups. As Louis Armstrong would have crooned, it was ‘an IPO to build a dream on’.
Against: When the stock is unable to sustain its hype across market cycles (especially bear), the IPO could one day be positioned as the ‘marketing hogwash that ruined investors’, doing more harm to the startup movement than good.
For: The success of the IPO validates that investors believe in the under-penetrated consumption potential of India.
Against: The success appears to be more a validation of a liquidity-driven world where investors will create bubbles of their own to justify reckless investing.
For: The success of the Zomato IPO is a coming of age of financial marketing in India.
Against: The success of the IPO represents a temporary setback for the Deep Value School of Investing, where India’s largest steel manufacturer, with an EBITDA (earnings before interest, taxes, depreciation and amortisation) of Rs 6,916 crore for the fourth quarter of 2020-21, is valued at ₹52,000 crore, and a loss-making internet company some years away from EBIDTA-positivity is valued higher.
For: IPOs like these need to be appraised by new appraisal benchmarks, where it may not be necessary to report a profit and yet be considered successful.
Against: The three most important words of investing will boringly remain ‘cash-flows, cash-flows, cash-flows’.
For: The increased net worth provides investors with the assurance of a well-capitalised balance-sheet.
Against: The substantial equity infusion before the IPO is proving too much of a coincidence, and is seen by the conservative as an ‘inducement’ to invest in the issue without enough convincing done on the earnings capacity of the company.
For:Amazon is yet to report a profit in nearly a quarter of a century but is still prohibitively valued. Why should Zomato be treated differently?
Against: If business development costs were not expensed, Amazon would be among the most profitable companies in the world. Zomato needs to first prove it can break-even at the EBIDTA level without expensing business development costs.
For: The internet platform business is about burning capital, pricing low, attracting consumers, building sustainable market share and delivering profits in the future.
Against: The ‘sustainability’ of a platform is only as long as there is no new platform that has more capital to burn, larger losses to sustain and bigger market share to carve away.
For: The investment by mutual funds in Zomato represents a testimony to serious investing in new-age platforms.
Against: The investment by mutual funds — including ones focused on dividend yields — in loss-making companies with low-profit visibility is a subject that could warrant regulatory scrutiny.
For: The per-delivery turnaround in the company’s performance in a challenging 2020-21 represents a watershed in the company’s business.
Against: The ‘per-delivery turnaround’ has been described by a number of market observers as an instance of ‘liberal accounting interpretation’, which is polite jargon for ‘accounting arbitrariness’.
For: The Zomato issue is reasonable when one considers that it addresses only a fraction of the fraction of the 139 crore population of India.
Against: The Zomato issue was priced at 26 times its annual revenues, compared with Uber (8 times) or Just Eat (10 times), making the former possibly the most expensive IPO of its kind in the world. Its estimated post-listing valuation is higher than the combined market valuations of all western-style Indian quick-service restaurant (QSR) and Indian hospitality companies combined — that is, the one person who brings me the meal is more valuable than all those who make them.
For: Zomato is a visible brand that should generate sustainable market share traction.
Against: The success of Zomato could be its own enemy, attracting wannabes who attract fundraising that only deepens the food delivery price war.
For: This time it is different.
Against: ‘This time it is different’ are the five most dangerous words in investing anywhere. They said that about a wind renewable energy hardware company that was once valued in excess of Rs 40,000 crore, which now quotes at less than 20% of that historic valuation.
For: The IPO was an excellent opportunity to buy cheap.
Against: No IPO company leaves value for investors. (If they did, the merchant banker would not be paid full fees!) Besides, how do you guess that an infinite private equity (PE) ratio (as long as the net loss continues) is ‘cheap’ compared to a hypothetical PE ratio (based on a net profit that could be decades away)?
And, to finally answer what I did with my cash last week, I didn’t invest in the Zomato IPO. I was distracted by a meal Ramu had cooked at home.
( Originally published on Jul 18, 2021 )(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)