Home / Markets / Mark To Market /  Zomato IPO to deliver mouth-watering returns for private market investors

There is such great appetite for the IPO of food delivery firm Zomato Ltd that it has advanced the dates of the issue and increased the size of the share offering by 20%.

What’s more, the IPO price band of 72-76 per share values the firm at around $8 billion. The pricing at the higher end is about 70% above the price of 44.8 large private market investors paid in a $600 million funding round less than a year ago.

The investors included Tiger Global and Kora Capital. Temasek, which also participated in the funding round, had purchased shares at far lower prices earlier, bringing its average cost of acquisition to around 31 apiece.

Zomato's valuations since 2010.
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Zomato's valuations since 2010.

Some other investors have made far greater returns, depending on when they first bought a stake in the firm. The biggest gainer from investments in Zomato, of course, is Info Edge (India) Ltd, which started investing in the firm in August 2010. Its average acquisition cost is only around 1.16 per share, which means it stands to gain returns of about 6,500%.

Sequoia Capital, an early stage investor, has made handsome returns, too, albeit lower than that of Info Edge. For Ant Group, which started investing in the firm about three years ago, the average acquisition price works out to 17.3. This is after adjusting for the profit it booked by selling part of its stake earlier this year. Its returns are as high as 340%. Of course, Ant Group’s investments are what triggered a massive re-rating of the firm. This coincided with a shift in the business model, with Zomato pursuing food delivery more aggressively after the investments. But while private market investors have made mouth-watering returns, public market investors may be coming to the scene a tad late. Zomato is listing more than 11 years after it was incorporated, as the private market provided more than sufficient capital for its growth.

Michael Mauboussin and Dan Callahan of Counterpoint Global point out in a research report, “A consequence of staying private longer is that more wealth is created in the private market and less in the public market."

Zomato’s listing is similar to that of Uber in terms of time taken to go private. Uber’s returns have been very modest since listing, and far lower than firms such as Amazon and Facebook, which took their firms public much earlier.

As the chart shows, Zomato’s valuations tend to re-rate after every large fund-raising. In that backdrop, the 9,000 crore IPO threatens to be a peak, as it is the largest ever fundraise by the firm. Zomato will end up with cash of 15,000 crore post-IPO, or as high as 25% of its market cap. While the high cash reserves will give the firm protection against irrational competition and capital for growth, it will be difficult to replicate the huge fund-raising and the strong re-rating in valuations as in the past year.

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