Case Study | Zomato’s IPO: It’s a loss, why’s there excitement?

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A Zomato delivery employee

The much-awaited IPO of 2021 is that of Zomato’s. Considered to be one of the biggest IPOs of 2021, the company has finally drafted papers with the Securities and Exchange Board of India (SEBI). But, why the hype in the market for Zomato’s shares when they are a company in loss?

The IPO of Zomato will expect to raise the value of the company. Dealers in the unofficial market trading in unlisted shares mentioned that the valuation of the company could be almost Rs. 53,000 crores. The anticipated valuation of Zomato will make it bigger than one-third of the enterprises listed on the index of Nifty 50.

Zomato had revealed that the total amount of its IPO would be Rs. 7,500 crores in June. However, due to the heaping demands from the investors, the company had to up the total size of the issue. Because Zomato had not reached profitability yet, the part of the IPO, as offered to the retail investors, has been restrained to 10% of the entire size of the issue.

The difference between the other companies listed on Nifty 50 and Zomato is that the other companies are generating profit for the past many years. On the other hand, Zomato is reporting losses for the past four years continuously.

In December 2020, the firm recorded a net loss of Rs. 682 crores and Rs. 2,385 crores for the year 2019-20, Rs. 1010 crores for the year 2018-19 and Rs. 107 crore for 2017-18. Hence, in the draft submitted to SEBI, the firm stated that they have a past of net losses and are anticipating an increase in the expenses in the future.

Zomato notified the investors that expenses are to increase in the future for the company rather than profit and that their losses to continue for some time. The firm also stated that, even from the investments, it would require a period to develop the business.

The company has recorded negative cash flow in the previous three financial years. Most of the negative flows are because of the increase in promotion and advertising expenses to pull new customers to grow their operations on the platform.

Despite all this, IIFL securities expect that the firm will grow its net revenues by 48% every year for the next five years. They expect the firm’s fixed costs to increase at a rate of 27% every year, which would provide growth in the operating margin for the next ten years.

Along with IIFL securities, Raamdeo Agarwal, chairman, and co-founder of Motilal Oswal Financial Services mentioned that by offering valuations, one would not expect what the company has earned in the last five years, but will be looking at what the firm will gain in the coming 25 years.

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