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Investors are on a high, with jab sessions beginning in earnest in the UK, and expected to gradually spread worldwide soon. One clear sign of the euphoria is the massive listing gains of recent IPOs in the US. DoorDash Inc., an American online food delivery services firm, had an extraordinary debut, with a listing gain of over 80% from its issue price. The company, which posted a net loss of $149 million for the nine months ended September, listed with a market capitalization of $60 billion. For perspective: private investors had valued DoorDash at $16 billion in June. Based on the IPO pricing, the firm was valued at around $32 billion.

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Satish Kumar/Mint

Indian food delivery companies could well be licking their chops at potential IPO valuations. Swiggy and Zomato are being valued at $3.5 billion and $3.6 billion, respectively, based on latest reports. Using the wide divergence between the private market and public market’s perception of valuations of internet companies these days, the latter may well value Swiggy and Zomato at well over $12 billion. According to reports, Zomato is looking at an IPO in 2021. “DoorDash’s spectacular listing should have a positive influence on the valuations of Indian food delivery companies and provides a good benchmark for their listing," said Anuj Kapoor, managing director and head of Investment Banking, UBS India.

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“It’s possible that DoorDash listing may encourage Indian food delivery firms to re-evaluate their plans and list sooner," said Ritesh Jain, a global macro investor and a former executive at BNP Paribas Asset Management India Pvt. Ltd.

DoorDash is among firms that benefited from the covid-19 crisis, witnessing a significant increase in total orders, marketplace GOV (gross order volume) and revenue as people avoided stepping out due to fear of infection.

In India, though, the stringent lockdown has hurt Swiggy and Zomato, with consumers preferring home-cooked or packaged food. Moreover, there were supply-side challenges with several restaurants not functioning, migration of restaurant workers and working capital crunch. The good news is that management commentary suggests things have picked up, both in terms of orders and unit economics. “Swiggy, the market leader in food delivery, highlighted that while covid did have an impact, order volume is approaching pre-covid levels of 1.2 million per day, with positive contribution margin and the company is on track to Ebitda profitability in food delivery by 1Q21," pointed out Jefferies India Pvt. Ltd in a report on 6 December.

Swiggy and Zomato have focused on improving profitability metrics by charging higher delivery fees (to consumers), reducing discounts and marketing spends and saving on other operating expenses. Analysts reckon these steps, along with high order values, have likely helped these companies improve their unit economics. JM Financial Institutional Securities Ltd says, “Zomato reported contribution margin gain of 27 per order in 1QFY21 versus a loss of 47 per order in 1QFY20 (on a sustainable level though, the company mentioned that it expects contribution margin of 15-20 per order, with Ebitda improvement to be driven by volume growth). At the group level, Zomato’s monthly burn had reduced to $4 million in 1QFY21 versus an average monthly burn of $24 million in FY20."

Penetration levels are lower compared to other markets, but there is the threat of potential competition from firms with deep pockets. As JM Financial puts it, “Amazon’s recent entry into India’s food delivery sector needs to be keenly watched."

To be sure, the pandemic has accelerated growth in most internet segments and valuations of tech companies are soaring. In fact, Airbnb Inc. saw a listing gain of over 100% last week. Against this backdrop, it’s not surprising that shares of Info Edge (India) Ltd, which owns a 20.8% stake in Zomato, hit a new 52-week high on Friday on NSE. The stock is now 33% ahead of the average target price of 17 brokerage firms. News reports suggest Zomato is looking to list in India. While some experts think a listing in the US markets would enable Indian companies to fetch much higher valuations, there are others who feel the Indian markets are capable of absorbing some paper. “Given the current market sentiment, positioning of domestic food delivery companies and depth of Indian markets, a listing in India too would be a viable option for such companies and fetch them attractive valuations as the domestic market can very well absorb paper worth a couple of billion dollars. Perhaps, bigger companies such as Jio Platforms Ltd may fare better by listing in the US market given the depth of the market, wider investor base and better comps available there for that sector," Kapoor said.

“Indeed, there is a frenzy going on in the US IPO markets, and if the Indian firms have proper documentation to satisfy regulators, I think you will see them pretty soon. The case is simple: you have to take the capital when it’s available, and liquidity has never been so easy with both DoorDash and Airbnb listing way above initial expectations," Jain said.

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