Is Zomato IPO super expensive or price band just an optical illusion?
A common question that bothers multibagger hunters in India most of the time is whether the stock they are planning to buy is a value stock or a value trap. With the big-bang entry of unicorns like Zomato on Dalal Street , the question now takes a new dimension - is the stock expensive or just optically expensive?On Twitter, Robinhood investors are already comparing how Zomato may deliver Amazon-like multifold returns to the faithful, while the old gangsters of Dalal Street are raising eyebrows over what they call expensive valuations and narrow margins. "Right now, the liquidity rush is just sweeping everything away. It is very difficult to say whether this will be the new Amazon or will it be the 1,000-plus dot-com companies that just went out of business," independent market expert Ajay Bagga said.While on the one hand, nobody wants to miss the biggest party in town, investors also do not want their portfolios to get weighed down by a white elephant. Indian investors, who are so used to applying the traditional price-to-earnings (P/E) multiple to calculate the value of a particular stock, are having to digest the fact that the loss-making Zomato's P/E is a negative 122.If bhav bhagwan che, then how do you value whether Zomato's IPO price band is expensive or fairly priced at Rs 72-76?Some analysts say one should look at the growth profile, market share and use metrics like enterprise value-to-sales.Calculated at the upper end of the price band at Rs 76, Zomato IPO is priced at 25X EV/sales. The food delivery firm's global peers like Door Dash, Delivery Hero, Meituan, etc trade at an average of 9.6X EV/sales. For Indian QSRs like Jubilant FoodWorks, Westlife Development and Burger King, the average comes out to be 11.6X, according to calculations done by Motilal Oswal Financial Services.One key factor why Zomato is more expensive than its global peers is the scarcity premium attached to an internet stock-hungry market in India, where brands like Amazon, Facebook and Netflix are in common use, but their stocks are elusive. "A good part of the scarcity premium is justified because the market is underpenetrated and the growth rates are much higher compared with global peers. You are going to see an increased frequency of orders in the metro cities. In Tier-II and Tier-III cities, there is a scope to grow the number of fresh users as well as the frequency of orders," says Karan Taurani of Elara Capital.Analysts from ICICI Securities argue that the scarcity premium will likely outweigh the argument of perceived expensive valuations of the food delivery industry, which is just coming out of nascence. In a report, the brokerage listed out four other reasons why the near-term multiples are likely to be deceptive -- the duopoly nature of the business, robust long-term growth potential, rapidly improving unit economics and strong management teams. "Further, the visibility around the optionality of future-use cases is often limited in the case of technology companies. Accordingly, near-term multiples (FY22E or FY23E) will likely be deceptive," ICICI Securities said.Sharing a similar view, Motilal Oswal's research analyst Sneha Poddar said valuing such early-stage businesses on a plain vanilla financial matrix might not give the right picture and may look distorted. "It enjoys a couple of moats and as economies of scale begin to play out, the losses have reduced substantially. However, predicting the growth trajectory for the next few years is a little tricky at this juncture," she said.Once the food delivery industry in India, which is largely a duopoly between Zomato and Swiggy , matures beyond the ongoing discounting phase, cash flows will turn positive.Zomato's logo might be buried in hues of red, but shareholders want its balance sheet in the green sooner than later.