Zomato Commands A Premium Of INR 15-20 Per Share In Grey Market Ahead Of IPO

In the run-up to the official announcement of Zomato’s initial public offering (IPO), the food aggregator’s stock is seeing a lot of interest in the grey market, according to reports.

Reportedly, unlisted shares of the foodtech unicorn are  trading at a price which is INR 15-20 higher than the projected IPO price in the unofficial markets for trading in such shares, according to an ET report. Ultra-rich investors usualy track the grey market premium as an indicator for  likely listing gain that an IPO can offer.

The restaurant aggregator is expected to open for subscription on stock exchanges on July 19 at a price band of INR 70 – INR 72 per share, following the Securities and Exchanges Board Of India (SEBI) submitting its observations on Zomato’s draft red herring prospectus (DRHP).

While SEBI’s observations are not privy to the public, the regulator is said to have cleared the path for the Zomato IPO, which would be a mix of fresh issue and an offer for sale (OFS) from existing investor Info Edge. Zomato issue is expected from July 19 to July 22 as the market is closed on July 21 for Bakri Id, as per reports. However, the company is yet to make any formal announcement. 

Dinesh Gupta, cofounder of UnlistedZone and a grey market tracker, was quoted as saying that the premium is likely to rise in the days ahead as the stock is very popular among investors. Gupta said the IPO would be a litmus test for domestic startups planning IPOs. “Zomato is among the top beneficiaries of Covid-19 related restrictions. We expect the company’s revenues to rise in the coming quarter,” he said.

Grey market watchers expect the company to raise over INR 9,300 Cr from the primary market, with about INR 1,500 crore likely to come in via pre-IPO placement.

The Zomato IPO Plan

The price band of INR 70-INR 72 per share would put Zomato’s IPO close to INR 9,375 Cr, making it the second-biggest IPO in the last four years after SBI Cards. At the upper end of the speculated price band, the company would be valued at around INR 56,240 Cr or $7.6 Bn.

Zomato’s offer will comprise fresh equity of INR 9,000 Cr, while Info Edge will sell shares worth INR 375 Cr in the OFS portion. Info Edge revised its quantum of share sale in the upcoming Zomato public offering to INR 375 Cr earlier this month, 50% lower than the originally planned INR 750 Cr stake sale.

In the latest round of funding, Zomato’s price per share was INR 55-60, for a valuation of INR 40,000 Cr or just over $5.4 Bn. Zomato filed its DRHP on April 28 and in it, the company has claimed its financial situation has improved amid the pandemic.

In particular, Zomato said that its unit economics has improved considerably. It achieved positive unit economics with a contribution margin of INR 22.9 per order on average from April to December 2020. This is a massive improvement from the negative INR 30.5 margin logged in FY20 (or March 2019 to March 2020), which means Zomato is actually making money per order on an average, rather than burning cash to fulfil deliveries.