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Why you should take note of IPOs like Zomato

Sooner than later, they may get into benchmark indices like the Sensex or the Nifty. That is what drives a lot of long-term investors like mutual funds and pension funds to invest.

Published: 12th July 2021 03:53 AM  |   Last Updated: 12th July 2021 11:11 AM   |  A+A-

Zomato

Zomato (Photo | AFP)

Express News Service

Consumer technology is fast becoming a way of life in India and everywhere in the world. Zomato, a consumer technology company that delivers food to subscribers, goes public later in the week. 

This column is not about making a recommendation to you about the public offer. You need to speak to a registered financial advisor about that. The idea is to nudge you to take advantage of the information and strengthen your defences against investment risks. There is a wealth of information in the offer document filed by the company that you could use to enhance your knowledge about a new sector. There are several interesting facts mentioned in the paper. 

What lies ahead

The prospectus highlights the outlook for the food delivery business. There are about 4 to 5 crore online delivery users in India compared to 9 to 12 crore in the US and 43 to 45 crore in China. Only 43 per cent of people in India have access to the internet.

ALSO READ: Zomato's Rs 9,375 crore IPO to open on July 14 for subscription

That is nearly half of the US and two-thirds of China. That becomes the addressable market. In that context, the market penetration of food delivery is only 9 per cent in India. In the US and China, it is 36 and 56 per cent respectively. That means there is scope for growth in the business. 

When companies grow business, they generate cash that helps them further expand the reach for their goods and services. Investors choose to discount future growth and pay the price they get today for an equity share. 

ALSO READ: Can Zomato shift food consumption demography?

In the absence of profits, the way to measure the company’s performance is by watching the trend in monthly active users or MAU on the app. They have to grow steadily every quarter. The other metric for the food delivery business is the gross order value or GOV. It means the total monetary value of the orders, including taxes, customer delivery charges, and all discounts, excluding tips. 

The challenges
Investing in a company like Zomato comes with risks, just like any other business. The prospectus lists over 60 risk factors. Just like it is supposed to highlight prospects that would make you invest, the prospectus must also mention risks associated with the business. The company faced significant challenges in 2020-21. The first quarter of the year was the worst-ever in terms of GOV for the company. However, the company reported the best quarter in December 2020, the prospectus said. The pandemic is not over yet. People are reluctant to visit restaurants and order food as they used to in the past due to hygiene issues. 

Consumer tech companies like Zomato usually focus on revenue growth and do not focus on profits in the early stage of development. With an increasing commitment of prominent private equity investors, the company has diluted equity. That means it has to work harder to earn profits in the future. The market is lucrative but very competitive. It will not be easy to compete profitably. That is because there are no significant entry barriers. A global player with more capital can challenge Zomato.  

What next
Besides Zomato, there were reports that Paytm, India’s biggest payment app, would go public. The beauty of these companies going public is that investors would know more about these new growth sectors—like how they do business and create value. There are already many prominent, influential investors who have invested in the past in these companies, waiting to exit. These businesses are not capital intensive. They go for IPO or a public issue, usually to offer an exit route to influential investors. They would also add considerable weight to the market value of shares traded in India. Considering the potential, companies like Zomato would continue to grow revenue. 

As an investor, the bet you take should come after you figure out if you can benefit when these companies turn in the profit. Sooner than later, they may get into benchmark indices like the Sensex or the Nifty. That is what drives a lot of long-term investors like mutual funds and pension funds to invest. 

(The author is editor-in-chief at www.moneyminute.in)



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