The food delivery market is at the cusp of evolution and Zomato has established a strong position in this duopoly market. Predicting its growth trajectory is tricky, and predicting when will it go profitable speculative. However, given how the company keeps reinventing itself by creating new markets makes it an interesting play. The question is should you invest in this loss-making company?
- IPO Brief
- Key IPO Details
- How does Zomato make money?
- Peer comparison
- Financial Performance
- Should you invest in Zomato IPO?
The much anticipated Zomato IPO finally opens tomorrow 14th July 2021 and will be open for subscription until 16th July 2021. The price band has been fixed at Rs 72-76 apiece, giving it a market valuation of Rs 59,623 crore or a whopping US$8 billion.
Interestingly, the Zomato IPO’s valuation of ~Rs 60k crore is equivalent to the combined market value of all the quick service restaurants (QSRs) listed on Indian stock exchanges.
Zomato, one of the leading online food delivery platforms, will be the first food tech company to list on Indian bourses. In addition to food delivery, Zomato also offers restaurant listings, reviews, and dine-out services.
The maiden offer by the food delivery firm comprises a fresh issue of Rs 9,000 crore and sale of shares worth Rs 375 crore by existing investors, according to its red herring prospectus. The majority of money raised, i.e. Rs 6,745 crore, will be used to fund the company’s organic and inorganic growth initiatives.
Founded by Deepinder Goyal in 2008, Zomato currently has a global presence in 24 countries. In India, Zomato is catering to more than 526 cities with over 3.5 Lakh active restaurant listings.
InfoEdge is the largest shareholder in Zomato with an 18.5% stake while its Founder and Chief Executive Officer Deepinder Goyal owns a 5.5% stake.
Key IPO Details
- Price band: Rs 72-76
- Face value: Rs 5 per share.
- Fresh issue: Rs 9,000 crore.
- Offer for sale: Rs 375 crore
- Minimum bid size: 195 equity shares.
- Listing: NSE and BSE.
- Book running lead managers: Kotak Investment Banking, Morgan Stanley, Credit Suisse, BofA Securities, Citi and Link Intime India.
How does Zomato make money?
We all know Zomato as a food delivery and restaurant listing company, which is true, but there’s more to it.
Zomato has both B2C as well B2B business models. Let’s look at all its product offerings and its revenue sources:
Food delivery: Zomato has a food delivery and discovery platform. Zomato charges commission from the restaurant partners who list on its app and for food delivery. this accounts for a majority of the company’s revenue.
Dining Out: Provide tools for restaurant owners to acquire customers, while allowing customers to search and discover restaurants. Through this offering, customers can read & write reviews, view & upload photos, table booking and making payments for dining out at restaurants. It monetizes the business through advertising sales, and restaurateurs pay the company for visibility as well. 389,932 active restaurant listings on their platforms as on Mar-21 and 61.8 million units of CGC was generated vs 157 million in FY20. In FY21, 3.3 million table reservations were booked through their platforms vs 12.2 million in FY20.
Hyperpure: Hyperpure is farm-to-fork supplies offering for restaurants partners. Zomato sources fresh, quality ingredients from producers, processors, farmers, and supplies to its restaurant partners. It will help restaurant partners manage their supply chain more effectively and predictably improve the quality of food served to customers. They supplied over 9,225 restaurants partners across 6 cities in India in the month of Mar-21 under this transaction-based model.
Zomato Pro: Zomato Pro is a subscription-based offering, under which the members get flat percentage discounts at specified restaurant partners across food delivery & dining out offerings. Zomato had 15 lacs pro members and over 25,443 restaurant partners in India under its pro service as of Mar-21.
Its international segment contributes about a tenth of its business and 2.5% of its total assets, according to its RHP. However, it accounts for more than 15% of liabilities, and over 13% share in loss in FY21, the filings revealed.
They also recently invested in Grofers, and will possibly enter the competitive online groceries soon enough. However, currently, the company’s topline is dominated by its food delivery business.
Zomato and Swiggy are the two major players in the food delivery market. Zomato acquired Uber Eats in 2020 for Rs 2,485 crore, and the joint entity captured 50-55% market in the food delivery business. With all the acquisitions and aggressive growth, these two players have made food delivery a duopoly market. This also means that anyone can come in and disrupt the market (Amazon?).
|Commission/monetization rate (FY19/FY20)||20% / 22%||20% / 22%|
|Valuations (US$ billion)||5.4 (as of Feb 2021)||5.0 ( as of April 2021)|
|Revenue – FY20||₹2,742 cr||₹2,956 cr|
|Loss in FY20||₹2,385||₹3,920|
For the financial year 2021, Zomato posted revenues of Rs 2,118 crore, down from Rs 2,742.7 in FY20. The company’s losses however narrowed from Rs 2,363 crore in FY20 to Rs 812 crore. In FY2021, the revenue witnessed degrowth due to countrywide lockdown and delivery restrictions. However, the fourth quarter was a strong quarter in terms of revenues.
At FY20’s absolute run rate, the company’s cash balance would suffice for 6-7 years of cash burn, while at a lower burn rate, it can run on 10-years of cash burn.
Should you invest?
Let’s talk about valuation first. A consumer tech company cannot be valued based on traditional valuation models like PE or EBITDA. These companies are in a hyper-growth mode and are globally valued using a benchmark such as Price to Sales (P/S) or a percentage of the Gross Order Value.
At the upper price band of Rs 76, the issue is offered at Mcap/Sales of 29.9x to its FY21 sales of Rs 1,994 cr. There is no doubt that the company is commanding a lofty valuation, compared to its global peer set, especially considering its loss-making status that has got many investors worried. At the same time, the buzz about the IPO in the market makes it too hard to resist – FOMO.
The Indian food delivery market is set for huge growth going forward, which at present is evolving on the back of favorable macroeconomics, changing demographic profile, and rising adoption of technology in every household.
The food services industry still only contributes only about 8–9% to the food market in India. In countries like the US and China, they make up nearly 40%-50% of the food market. So there’s clearly a lot of room for growth for companies like Zomato.
We like the company because of –
- its widespread and well organized on-demand hyperlocal delivery network
- strong consumer brand equity across India
- its the leading Food Service Delivery platform with a strong network of restaurants and delivery partners, who fulfil 94.9% of order delivery.
- its highly personalized, intuitive, simple to use, visually appealing mobile app designed to drive high engagement with the customers.
- the ability of the company to quickly pivot
The food delivery market is at the cusp of evolution and Zomato has established a strong position in this duopoly market. Predicting its growth trajectory is tricky, and predicting when will it go profitable speculative. However, given how the company keeps reinventing itself by creating new markets makes it an interesting play.
Considering huge scalability in business, the potential opportunity of growth in the market size as compared to the other nations, and the fact that India is on the cusp of offering higher employment potential for women, we recommend investors subscribe to this IPO for the long-term perspective.
We would say, investors with a high-risk appetite and a long-term investment horizon can subscribe to the Zomato IPO. If you are a risk-averse investor, stay away from it as it really is a high-risk investment proposition.