Why are people Excited for Zomato IPO when its in loss

Alan Joseph Alan Joseph
May 3, 2021 5 min read
Why are people Excited for Zomato IPO when its in loss

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The Initial Public Offering of Zomato is the much awaited IPO of 2021. It is considered to be one of the largest IPO’s of 2021. The company on 28 April 2021 has finally filed the draft papers with the Securities and Exchange Board of India (SEBI). Let’s look at why there is so much excitement in the market for the issue of Zomato’s shares even though they are a loss making company.

Zomato IPO
Losses of Zomato
Zomato Warns losses to continue
Bad Cash Flows
IIFL Securities
Motilal Oswal Financial Services
Kotak AMC
FAQ

Zomato IPO

Zomato has been one of the biggest successful startups in India in the last decade along with Flipkart, Byju's and its rival startup Swiggy. The Initial Public Offering of Zomato is expected to increase the value of the company.

The dealers in the unofficial or grey market who trades in unlisted shares said that the valuation of the company could be around INR 53,000 crores. The expected valuation of Zomato will make it larger than one-third of the companies that are listed on the index of Nifty 50.

Losses of Zomato

The difference between Zomato and the other companies listed on the Nifty50 index is that they are profit making companies for several years or at least from the last decade. Whereas Zomato is recording losses continuously for the past 4 years.

For the last nine month period which ended in December 2020, the company has reported a net loss of INR 682 crores and INR 2,385 crores for the year 2019-2020, INR 1,010 crores for the year 2018-19 and INR 107 crore for the year 2017-18.

In the draft red herring prospectus, which was submitted to the Securities and Exchange Board of India the company has mentioned that they have a history of net losses and are expecting an increase in the expenses in the future.


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Zomato Warns losses to continue

Zomato has warned the investors that the company expects the expenses to increase in the future and their losses to continue for a period of time. The company said that from the significant investments it would require some time to grow the business.

The company has plans to pump in a lot of money into the marketing, advertising and promotion. They also have plans to expand its services to new markets in India and develop its platform in addition to expanding its delivery partner network.

The company said that these efforts would be costlier than they expect and added on saying that it may not result in the increase in revenue or growth of the business. The company said that the increase in revenue and the investments received will be spent on other expenses. This would prevent the company from increasing or maintaining its profitability at a consistent level or a positive cash flow.

Zomato Revenue Growth
Zomato Revenue Growth

Bad Cash Flows

Zomato has not just struggled in generating profit but has a bad track record of generating cash flows from its operations. The cash outflow of Zomato from operations is INR 269 crore in the year ended in December 2020.

The company has reported negative cash flow in the past 3 financial years. Most of the negative cash flows are due to the high promotion and advertising expenses of the company to attract new customers to scale up their operations on the platform.


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IIFL Securities

The brokerage firm IIFL Securities said in a report that it expects Zomato to earn an operating profit in the current financial year due to the increase in the demand of delivery business because of the coronavirus pandemic.

IIFL securities have an expectation that Zomato will increase its net revenues at a growth of 48 % on a yearly basis for the next 5 years. They expect the fixed costs to grow at a rate of 27 % on a yearly basis which would provide an improvement in the operating margin for the next decade.

Motilal Oswal Financial Services

Raamdeo Agarwal who is the chairman and co-founder of Motilal Oswal Financial Services has said that by giving valuations one wouldn’t look for what the company has earned in the past 5 years but will be looking at what the company will earn in the next 25 years.

Kotak AMC

Anshul Saigal who is the head of portfolio management services at Kotak AMC has said that it is confusing for investors, but he wants the investors to ask themselves a question before investing that is if the company stopped growing today will its business model earn profits. He added that the answer to this question is the heart of valuing a tech company.


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FAQ

Is Zomato listed in stock market?

Zomato is planning to go public in 2021.

Who is the CEO of Zomato?

Deepinder Goyal is the CEO of Zomato.

Is Zomato an Indian company?

Zomato, is one of India's largest food delivery company.

Conclusion

Zomato’s IPO will be more like a leap of faith for the Indian investors. The traditional way of valuing a business cannot be used by the Indian investors when it comes to valuing a business model like Zomato.

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