It’s finally happening. The most awaited IPO of 2021 is all set to take off. The Gurgaon-based Zomato is ready to open for its IPO. Zomato has grown from a young start-up to a big powerhouse in the last few years. It has come a long way in terms of orders, restaurant engagement, and even advertisements.
IPO SNAPSHOT
COMPANY OVERVIEW
Zomato is a multinational restaurant aggregator and food delivery service based in India. It is a technology platform that connects customers with restaurants and delivery partners to meet their various needs.
Pankaj Chaddah and Deepinder Goyal are the two co-founders of Zomato. It was founded as Foodie Bay in 2008 and renamed Zomato in 2010.
ZOMATO SERVICES
Zomato’s business model is based on the premise that, over time, people in India will eat out more than they will cook at home. They believe that restaurant food should have Assortment, Affordability, Accessibility, and Quality (AAAQ). Their business has two streams Business to Business and Business to Customer.
Zomato Food Delivery
Zomato food delivery is the largest food delivery company in India. It claims to deliver 94% of its orders in 30 mins. Their food delivery orders have increased 13.2 times since 2018. The primary contributor to their revenue is the delivery charges.
Zomato Dining Out
Customers can use dining-out offerings to find and book restaurants, read and write customer reviews, view and upload photos, book a table, and make payments while dining out. They are India’s largest online table reservation service.
Zomato Hyper Pure
Hyper pure is a farm-to-fork supply service for Indian restaurants that began in 2019. They supply to the restaurant partners by sourcing hygienic and fresh ingredients directly from farmers, producers, mills, and processors.
Bengaluru, Delhi, Hyderabad, Mumbai, Chandigarh, and Pune are the six cities in India where it currently operates.
Zomato Pro
Zomato Pro is a paid membership program that provides customers with flat percentage discounts at select restaurant partners for both food delivery and dining-out options.
The percentage discount available to Pro Members at their restaurants is chosen and funded by Pro Restaurant Partners. Pro Restaurant Partners can use the program to market themselves to a targeted audience.
SHAREHOLDING PATTERN OF ZOMATO
Info Edge is the only company that will be exiting its stake. They are selling their stake worth Rs. 375 Cr worth shares. They are sitting on almost 77x return and their shares have been rallying since Zomato announced their IPO in the previous week.
OBJECTIVE OF THE ISSUE
The major objective of the issue is funding organic and inorganic growth initiatives. Rs. 6,750 Cr will be spent for this purpose. The second objective is to provide funding for general corporate issues.
INDUSTRY OVERVIEW
India’s internet and smartphone penetration has nearly doubled since 2015, and it’s still rising. By 2025, India is expected to have 985 million internet users. Indian Food services industry is still in its nascent stage
KEY OPERATING METRICS
Gross Order Value (GOV) has increased pretty well. Due to the lockdown, 9MFY21 cannot be considered as the right indicator. Deliveries were halted, most restaurants were shut down and many people preferred homemade food.
The number of orders going down is also because of the same reason mentioned above.
Average Order Value (AOV) means the number of people the food is being ordered for and the price of food at restaurants. Orders from high-end or premium restaurants have higher AOVs. AOV hasn’t moved much since the last 3 years.
The recent rise in AOV can be attributed to the fact that many people are ordering from these platforms because the restaurants and dine-in are both closed. Another reason could be Zomato is taking a higher commission from restaurants when customers order the food thereby increasing the price of the food.
FINANCIALS
Even though the revenues have been consistently increasing, Zomato is a loss-making company. The expenses have been skyrocketing year on year.
The cash flows are bad. There is no free cash flow as the company is loss-making.
It has a Complex capital structure due to a lot of subsidiaries in different parts of the world. They currently have 35 subsidiaries, including 14 direct and 21 indirect subsidiaries and one joint venture.
PEER COMPARISON- COUNTRY VIEW
| Zomato | Swiggy | |
| Cities Present | 556 | 523 |
| FY 20 Revenue | 2743 Cr | 2955.6 Cr |
| FY 20 Total Expenses | 5006 Cr | 6600 Cr |
| FY 20 Net Loss | 2386 Cr | 3920.4 Cr |
| Market Share | 45% | 47% |
| Commission Rate (CY19) | 20% | 20% |
| Commission Rate (CY20) | 22% | 22% |
| Valuations | 5.4 Bn USD (As of Feb 2021) | 5.0 Bn USD (As of April 2021) |
Amazon has started its food delivery project in India in May 2020 in Bengaluru. It currently provides services only to Amazon employees. Amazon charges a delivery fee of Rs19/order, which is waived for prime members. Amazon food orders are said to be 35-37% cheaper than Swiggy and Zomato food orders.
Food Services is a competitive market in India comprising food delivery players like Zomato and Swiggy, cloud kitchens and branded Food Services players, and quick-service restaurants like Dominos, McDonald’s, and Pizza Hut.
Zomato has become the category leader in the food delivery space in India by consistently gaining market share in the competitive market.
PEER COMPARISON- GLOBAL VIEW
Meituan Dianping is the largest online food delivery player in the world and is based out of China.
Doordash is an online food delivery platform in San Francisco with a 56% market share.
Doordash went public with a great valuation of $16 billion (before IPO). Doordash has better growth numbers than Zomato. Their average order values are 5 times more than Zomato or Swiggy. They operate in a more mature market and make more revenues. But still, Zomato shares are more expensive than Doordash.
VALUATION
Zomato raised its last equity round at the US $5.4 Billion in February. So it will be valued at a US $8 Billion valuation post issue.
The Earnings per share (EPS) was Rs. -1.51 for FY21 and Book Value (BV) was Rs. 15.09 for FY21.
ZOMATO MARKETING
Zomato’s Marketing strategies are something that everyone adores. The strength of their platform is their effective marketing tool. This has helped them generate strong organic growth through word-of-mouth since the early days.
The below infographic released by Zomato last year gives us fun insight into how people consume Zomato’s services across several cities in India.
SWOT ANALYSIS
RISKS
ANCHOR INVESTORS
Zomato will probably receive almost half its issue size of around $560 million from institutional investors.
Baillie Gifford, BlackRock, Capital Research, etc. are some of the top foreign investors in the company’s anchor book. Axis MF, HDFC MF, Birla MF, etc. are some of the domestic top investors.
GREY MARKET PREMIUM
Zomato shares were trading at Rs 86.25 per share in the grey market. It is about 13.5 per cent over IPO price.
ENDING NOTE
Food services, which are defined as non-home cooked food or restaurant food, currently account for only about 10% of the food market. When compared to global economies like the United States and China, where Food Services contribute approximately 54 per cent and 58 per cent, respectively, India’s contribution is significantly low. So there are still a lot of opportunities to make the best use of the Indian markets.
Only three players have survived in the Indian app food delivery market. Zomato, Swiggy, Amazon, and other unorganized players accounting for the rest.
Zomato has been one of the most awaited IPOs of the season. It has opened up for its IPO at the right time when the economics of the business looks positive and its Average orders have increased. It currently does not have any listed competitors in India.
Zomato is raising equity at a rapid pace to fund the business and covering losses, which leads to dilution of the equity stake. It’s still a loss-making company due to high expenses but its revenues have also been increasing rapidly.
Disclaimer – This written report is only for educational purposes. Consult your financial advisor before investing.
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