NEW DELHI: The much-awaited initial public offer (IPO) of food delivery major Zomato opened for public subscription on Wednesday.
With this IPO, Zomato will become the first online delivery company and also the first Indian unicorn startup to get listed on the bourses.
It is expected that the IPO will boost Zomato's market valuation to a whopping $9 billion.
The company has chosen quite an opportune time to go public with stock markets experiencing record rallies on the back of influx of investors.
Besides, the primary market is also on a spree with record levels of issuances during the first half of the year and strong IPOs already in pipeline for the next half.
Here’s why it could be a good option to undertake market investments this year:
Market share
Zomato's core business-to-customer (B2C) offering majorly comprises two segments -- food delivery and dining out.
In its draft red herring prospectus (DRHP), the company said it consistently gained market share over the past four years to lead the food delivery space in India.
The company grew manifolds over the course of the past few years with online orders witnessing a 13.2 times surge from 30.6 million in 2018 to 403.1 million in 2020.
Sharp recovery from Covid lows
Zomato's business was severely impacted in the first quarter of financial year 2021 due to the Covid-19 pandemic. Its food delivery business plunged to lowest in two financial years as lockdowns were implemented across the country to curb the spread of the virus.
However, the company witnessed strong recovery in subsequent quarters with number online food orders rising significantly.
The gross order value during Q3 was Rs 29,810 million -- highest that the company achieved in any quarter till December 2020.
Growth in unit economics
One of the biggest achievements for Zomato has been improvement in unit economics of its food delivery segment.
Good unit economics means that Zomato is at a better stage in achieving its break-even points and turning a profit on each order placed by the user. This happens when the average order value (AOV) order keeps rising and that is exactly what happened during the pandemic.
For instance, whenever an order is placed on Zomato it keeps a certain percentage of the order value as commission and passes on the rest to the restaurants.
If it is spending Rs 5 in delivering an order but is making Rs 6 via commission and delivery fees, then it would be said to have positive unit economics.
To achieve this, it is important for AOV to rise. The AOV will witness an uptick only when customers routinely seek more expensive orders.
Over the last seven quarters, Zomato's AOV has increased steadily from Rs 265 in Q1 of FY20 to Rs 408 in Q3 of FY21.
IPO valuation more than existing companies
The first-of-its-kind IPO is expected to have a market capitalisation of around Rs 60,000 crore.
Interestingly, this valuation is equal to the combined market value of all quick service restaurants (QSRs).
It is also higher than the market value of all shares taken together. The list includes the likes of Indian Hotels -- that runs the Taj chain of hotels; and Oberoi Hotels.
At present, there are about a dozen listed QSRs in India with a combined market value of more than Rs 60,710 crore.
Where does Zomato stand among global peers
In terms of annual GMV comparisons conducted by equity research firm Jefferies, Indian food delivery players are way behind their global peers.
The chart below clearly depicts both Indian companies Swiggy and Zomato are fairly smaller in terms of GMV comparisons.
It's IPOs ahoy!
India's primary market is set for a bumper Rs 80,000 crore bonanza with 30 companies already filing IPO papers to raise Rs 55,000 crore.
About 10 more companies are lined up for this month itself, seeking to mop up another Rs 25,000 crore.
So far this year, the markets have already raised Rs 27,426 crore from 22 issues.
Companies are expecting to benefit from strong liquidity and a bullish secondary market, which has seen a sharp increase in the number of new retail investors.
An IPO which every investor would be eyeing is that of India's largest insurer Life Insurance Corporation (LIC). With the Cabinet giving its nod to LIC divestment, its IPO launch is being touted to be the biggest public issue in Indian corporate history.
Apart from Zomato, other companies that are likely to hit the market this month include Glenmark Lifesciences, Windlas Biotech, Medi Assist TPA, Tatva Chintan Pharma, Paras Defence and Seven Island Shipping, together looking to raise about Rs 13,650 crore.
Stock markets added 142 lakh new investors
In the pandemic stricken 2020-21, a whopping 142 lakh new individual investors joined the stock markets, indicating a significant rise in retail participation.
With the pandemic impacting saving avenues of people amidst lower interest rates, the stock markets emerged as the top choice for investors.
Interest rates on various small saving schemes remained low varying from 7.6 per cent on Sukanya Samriddhi Yojana, 7.4 per cent on senior citizen savings scheme, 7.1 per cent on public provident fund (PPF) and 6.8 per cent on national savings certificate.
Interest rates on fixed deposits also remained low across banks in the last fiscal, with the largest lender State Bank of India (SBI) itself offering an interest rate ranging from 2.9 per cent to 5.4 per cent across tenures.
All these led to an increase in the retail participation in the stock market.
The BSE sensex rallied from 28,265 at the beginning of April 2020 to breach the 53,000-mark last month.
In terms of global peers, the benchmark sensex multiplied almost 1.8 times last year, surpassing markets of other major emerging economies, a report by SBI economists showed.
The market capitalisation of Indian companies grew at the fastest pace, despite the country experiencing a technical recession last year.
India IPO market v/s global peers
India ranks fourth in terms of number of IPOs launched during first quarter of 2021 in Asia-Pacific region, according to a report by PricewaterhouseCoopers (PwC).
It accounted for 8 per cent of all IPO deals conducted in the Asia Pacific region, and 3 per cent of all global deals.
In terms of proceeds raised from IPOs, India ranks third behind only China and Hong Kong with $2.6 billion proceeds from issuances.
Globally, the first quarter of the fiscal year has witnessed the strongest IPO activity in recent history. Issuances in Q1 of FY21 stood at $202.9 billion from 727 IPOs.
The report notes that technology and consumer discretionary have been driving the global IPO issuances with the largest being that of Kuaishou Technology which raised $6.2 billion on the Hong Kong stock exchange.
In other words, the US market dominated IPO issuances, accounting for 68 per cent of global proceeds.
Relaxed norms for listing of startups
Indian startups like Zomato, Paytm, Delhivery, MobiKwik, Nykaa and few others are now eyeing to go public to raise funds, perhaps to make best use of the market boom.
Earlier this year, the Securities and Exchange Board of India (Sebi) announced measures making it easier for startups to go public on the innovators growth platform (IGP).
Shareholding period for investors owning 25 per cent in such companies before listing has been reduced to one year from two years earlier.
Pre-issue shareholding requirement has also been hiked from 10 per cent to 25 per cent, thereby encouraging big investors to fund startups.
In addition, to migrate from IGP platform to BSE or NSE, earlier a startup required 75 per cent of its capital to be held by qualified institutional buyers (QIBs) -- if it fails to satisfy other conditions like profitability, net assets, net worth and more. Sebi has now reduced this cap to 50 per cent.
The market regulator has also allowed alternate investment funds (AIFs) and angel investors to invest in startups.
