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Zomato's strong price movement to boost IPO plans of digital majors

Zomato's strong price movement to boost IPO plans of digital majors

The strong performance of the stock has come as a good news for companies from fintech and online space that are looking to list on Indian exchanges.

Broking firms are quite bullish on the future prospects of Zomato and have recommended investors to buy the stock with a long-term perspective. Broking firms are quite bullish on the future prospects of Zomato and have recommended investors to buy the stock with a long-term perspective.

Shares of online food delivery major Zomato, which made its debut on July 23, have been trading strong on the stock exchanges, gaining nearly 5 per cent on Monday even as the stock registered losses during three trading sessions in the previous week.

The recently-listed online major gained Rs 6.25 or 4.69 per cent on Monday to close at Rs 139.60. Earlier during the session, it touched an intra-day high of Rs 140.65. The stock is up nearly 84 per cent when compared to its issue price of Rs 76.

Further, even as Zomato shares lost ground on three occasions in the previous week, it was able to recoup most of the losses the next day and did not register a continuous losing streak. For instance, it lost 5.86 per cent and 0.75 per cent on July 27 and July 28, respectively, but followed it up with a gain of 7.67 per cent on July 29.
 
More importantly, the strong performance of the stock has come as a good news for the potential companies from the fintech and online space that are looking to list on the Indian exchanges.

Also Read: Zomato to launch 'Zomato Pro Plus'; offers unlimited free deliveries

Among the bigger players in the segment, Paytm has already filed the draft document with the capital market regulator to launch its initial public offer. Apart from Paytm, online majors like Policybazaar, Nykaa, Mobikwik and Carwale are also mulling listing in the Indian stock market.

Interestingly, broking firms are quite bullish on the future prospects of Zomato and have recommended investors to buy the stock with a long-term perspective.

Global financial major UBS initiated coverage of Zomato with a 'Buy' rating and a 12-month target price of Rs 165. It expects the online food delivery major to grow at a CAGR of 40 per cent, making it one of the fastest growing internet companies in India.

"Not only did online food delivery get a boost globally in 2020, secular factors such as smaller family sizes, lesser time and willingness to cook and increasing affluence also provide a favorable long-term growth tailwind for online food market in India," the report by UBS stated.
 
"Unit economics are still evolving and competition from restaurants' self-built platforms/ non-delivery platforms such as Thrive, Dotpe will increase; a fragmented eco-system will ultimately allow aggregator-platforms to capture a lion's share of traffic. While valuations are not cheap at FY24e EV to sales of 17x, but EVSG (EV to sales to growth ratio) of 37x and superior growth leaves room for upside," it added.

Also Read: Paytm to hire 20,000 sales execs, create jobs in small cities

In a similar context, domestic major JM Financial has a 'Buy' rating on Zomato with a 12-month target price of Rs 170. "Our analysis suggests the company can turn profitable in FY25 on a cash EBITDA basis if it were to reach annual order volumes of 1bn (2.5x FY20 levels) and a contribution margin of around Rs 21/order," JM Financial said in its report.

The listing of Zomato was keenly followed by all categories of investors and market intermediaries as it was the first such listing of a pure-play tech entity from the online segment. While the company boasted of huge valuations in the private funding space, there was a lot of uncertainty about the manner in which the stock market would treat the online food major.

However, the performance after the company's debut on stock exchanges has made the answer clear. Zomato's current market capitalisation of Rs 1.09 lakh crore has made it a more valuable company than many age-old entities like Dabur India, Grasim Industries, Godrej Consumer Products, Hindalco, Indian Oil Corporation, Tata Motors and BPCL, among others.

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