What happens when India’s first home-grown food delivery startup ends up with a valuation of $14 billion (or more than ₹1 lakh crore, as of July 23)? In all probability, the restaurant owners would be smarting at the irony, grumbling that it’s a case of the teapot being hotter than the tea itself. For the country’s cohort of 500,000-plus restaurants valued at over $4 billion (according to trade body NRAI), the listing of their delivery partner has been nothing short of traumatic. Possibly, it has left them wondering whether making a meal is a more lucrative business or delivering one.

Welcome to the new age of investing where a potent mix of machine learning and fat cats can bring mythical unicorns to life on the bourses. As the maiden multibillion-dollar consumer tech startup to be listed, Zomato will have a lot of firsts to its credit, including the price at which it got listed. The appetite for the issue has been notable with 186 anchor investors, both local and foreign, bidding at the higher end of the price band of ₹76. Right from the sovereign wealth funds of Singapore and Abu Dhabi to foreign portfolio investors such as Capital Group, Tiger Global Investment Fund, BlackRock, and Fidelity, all are part of the roster. Even the top mutual funds players have bid through a cumulative 74 schemes.

The challenge with Zomato is that the loss-making firm can’t be seen from a conventional valuation framework of priceto-earnings (P/E) ratio, with most analysts looking at enterprise value (EV)/ sales, EV/market capitalisation, and price/sales. In its previous funding round, prior to the IPO, Zomato was valued at $5.4 billion (about ₹40,500 crore), about 15 times its EV/sales for FY20.

In fact, at its IPO price, the stock was valued at a market capitalisation-tosales ratio of 29.9x to its FY21 sales of ₹1,994 crore. On forward estimates, too, analysts believes, Zomato trades at a premium to other loss-making global peers. “At 19.7x FY22 and 13x FY23 price-to-sales at the higher end of the price band is certainly not cheap, while global peers trade at 2x–12x price-tosales,” says Pranav Kshatriya, analyst at Edelweiss Securities.

The only comfort that analysts see is that Zomato, post-IPO, will have a strong cash kitty, as of the ₹9,375-crore issue, `9,000 crore will come into the company, while only ₹375 crore goes to Sanjeev Bikhchandani-founded Info Edge, which owns over 18% in the startup. Zomato will end up with ₹15,700 crore of dry powder on its books, equivalent to around 15% of its m-cap. Besides, the startup has also pared its losses to ₹816.43 crore in FY21 from ₹2,385.6 crore in the previous year.

The work-from-home concept and shutting down of dine-out joints have resulted in more in-house ordering. As a result, Zomato’s average order value (AOV) has soared 39% versus its pre-Covid-19 levels as customers are not just ordering from regular quick service restaurants but also from premium and high-end chains. Karan Taurani, analyst at Elara Capital, however, believes that post-pandemic, the AOVs will trend lower as more and more consumers will start going to restaurants and fine dining joints to also partake in the dine-in experience. “This will hold especially true for premium fine dining chains,” says Taurani. Though delivery charges have gone up, at around 9% of AOV against the global average of 10%- 12%, there is only limited headroom for Zomato.

However, Rishi Jhunjhunwala, analyst at IIFL Securities, believes that the food delivery market has not yet reached the stage where players can start thinking about profitability at the expense of growth. “Steady-state profitability (15%-plus Ebitda margin) could be two-three years away while revenues could grow at 40%-plus CAGR till FY25,” mentions Jhunjhunwala in his report.

While Zomato did not respond to Fortune India’s queries, the prospectus states that costs will increase over time and losses will continue, given significant investments will be made towards growing the business. “We have expended and expect to continue to expend substantial financial and other resources on, among others, advertising and sales promotion costs to attract customers and restaurant partners to our platform, developing our platform, including expanding our platform’s offerings, developing or acquiring new platform features and services, expanding into new markets in India, and expanding our delivery partner network. These efforts may be more costly than we expect and may not result in increased revenue or growth in our business,” states the prospectus.

But for institutional investors such as IIFL Private Wealth, which has invested in Zomato through its Market Monopoly Fund, it’s all about envisaging the future. “The argument for Zomato is that investors see a pattern developing [in India] similar to what happened in China and the U.S., where a change in consumer behaviour [aided by technology] creates scale and size of the likes of Zomato,” says Yatin Shah, co-founder and executive director, IIFL Wealth.

Shah believes that these consumer tech companies can look at ways to increase the wallet share of consumers. For instance, analysts feel, through its B2B supply business Hyperpure and B2C grocery business through Grofers, Zomato is metamorphosing into a food tech super-app catering to a large part of the consumer food chain.

Though there are concerns around an imminent entry of the deep-pocketed Amazon in food delivery after its entry into groceries, analysts feel it will not be a cakewalk for the competition. Zomato and Swiggy have together raised more than $4.5 billion till date, even as players such as Foodpanda and Uber Eats, with expertise in food delivery, have exited the Indian market. “We believe the food delivery business cannot be built as an adjacency to another horizontal play and requires razor-sharp focus to drive returns. Hence, any threat from a third well-funded player is low. Also, a new player would have to compete with existing offerings and differentiate on factors other than pricing for building a sustainable base,” says Jhunjhunwala.

Though valuation-wise Zomato appears expensive to global peers such as DoorDash (which is trading at 11.5x in CY22) and Meituan (6x), given the fact that India has always traded at a premium versus global peers, investors are willing to play the theme. “Valuations may seem stretched in the near term, and there is also the possibility of a correction if an event-based risk plays out. But, from a longterm perspective, this is a duopoly business with low penetration and there is a huge market-grab opportunity out there,” says Shah. Considering that IIFL owns both Swiggy and Zomato as part of its portfolio, it only adds to his comfort.

Given the frenzy around Zomato, Info Edge’s market cap of ₹66,374 crore (as of July 27) has been dwarfed by Zomato on the day of its listing. Call it neighbour’s envy, owner’s pride—while the old-world entrepreneurs could well be riling, like a proud parent, Bikhchandani & Co., will gloat over Zomato’s performance on the Street in the times to come.

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