Zomato IPO Review | Should You Invest in Zomato IPO

Introduction:

Food Delivery Giant Zomato has announced its IPO information related to its price band and Subscription Window on 8^th July 2021. This offering was one of the most awaited IPOs of this Financial Year. Here is the detailed analysis of the Zomato IPO.

IPO Details:

• The IPO window of Zomato will be open from 14^th July 2021 till 16^th July 2021.
• The basis of allotment of IPO will be done on 22^nd July 2021, and the listing will take place on 27^th July 2021.
• The price band of the IPO is fixed at Rs. 72-76 per equity share.
• An Investor can apply for 195 shares in 1 Lot.
• The Issue Size of the IPO is Rs. 9,375 Cr. wherein, Rs. 9,000 Cr. is a fresh issue and the rest Rs. 375 Cr. is an Offer for Sale.
• The offer for sale has brought by InfoEdge, which is the parent company of Naukri.com and Jeevansaathi.com, and is an investor in Policybazaar.com.
• The objective of the fresh issuance are:
• Rs. 6,750 Cr. are marked towards organic and inorganic growth opportunities.
• The rest amount i.e., 2,250 Cr. will be used for general corporate purposes.
• The reservation criteria of Zomato IPO are as follows:
• Qualified Institutional Buyers (QIBs): 75% of the total issue
• Non-Institutional Investors (NIIs): 15% of the total issue
• Retail Investors: 10% of the total issue
• Employees: 65 Lakh Equity Shares.

Company Overview:

• Zomato is a technology platform that connects customers, restaurant partners, and delivery partners, serving their multiple needs. Customers use their platform to search/discover restaurants, read/write reviews and upload photos, order food, book tables, and make payments while dining out. They provide restaurant partners with marketing tools to acquire customers.
• Zomato is having food delivery operations in 525 cities.
• Total Active Restaurant listed in Zomato Platform is around 3.9 Lakhs as of March 31, 2021.
• As of March 31, 2021, Zomato is having a presence in 23 countries outside India. The Company has taken a conscious strategic call to focus only on the Indian market going forward. Given the large market opportunity in India.
• The company is having an active customer base of more than 3 crores.
• As of March 31, 2021, Zoamto had 3,755 employees worldwide.

Industry Overview:

i) Food Service Market:

• Food Services, defined as non-home cooked food or restaurant food currently contribute only approximately 8%-9% to the food market in India.
• This is substantially low when compared to global economies like the United States and China which have approximately 47-50% and 42-45% contribution from Food Services respectively (of the total food consumption).
• Food Services in India is highly under-penetrated, it is likely to grow steadily, taking share away from homecooked food as has been the trend in the past as well
• Key Drivers of Growth:
• Changing Consumer Behaviours
• Reduced Dependence of Millenials on home-cooked food/kitchen set-ups.
• Increasing Consumer Disposable Income and spending

Financials:

• Currently, the company is having cash reserves of around Rs. 4,500 Cr. With this additional issue, this cash amount will go up to Rs. 13,500 Cr. proving a strong balance sheet.
• A big positive part for Zomato is that the company has turned profitable on a per order basis of Rs. 23 as of December 2020.
• Key Operating and Financial Metrics as provided in RHP by the company:

Food Delivery Economics:

• We generate a majority of our revenue from food delivery and the related commissions charged to our restaurant partners for using our platform. Restaurant partners also spend on advertisements on our platform.
• There are three key stakeholders in a company’s food delivery business – (i) Customers, (ii) Delivery Partners, and (iii) Restaurant Partners.
• Customers: food delivery allows customers a convenient, on-demand solution to search and discovers local restaurants, order food, and have it delivered reliably and quickly.
• Delivery Partners: The delivery network of Zomato collects food from restaurant partners and delivered it to customers with a median delivery time of approximately 30 minutes.
• Restaurant partners – We had 148,384 Active Food Delivery Restaurants on the platform in March 2021.

The economics of the food delivery system of Zomato can be understood from the above image. Here is a brief overview of this economics:

i) Restaurant partner economics: The company charges restaurant partner commissions based on an agreed-upon rate. Further, they remit to the restaurant partner a net amount equal to the cost of food ordered and packaging charges less the commission and any restaurant-funded discounts. Separately, the restaurant partner may pay Zomato for any food delivery-related advertisement on the platform.

ii) Delivery partner economics: The company remits 100% of the tips and delivery charges provided by the customer to the delivery partner (pass-through). Incrementally, it pays the delivery partner an additional fee.

iii) Zomato economics: Zomato retains the commission net of any Zomato funded discounts. Additional fee to the delivery partner is paid by the Company. Additionally, the company also earns food delivery-related advertisement sales revenue from restaurant partners.

Things to Look For:

i) Higher-Order Value: Order Value specifically Per Order Average Value should increase.

ii) Discounts: The discounts provided by the company to attracts customers should go down.

iii) Marketing Expenditure: There should be also some reduction on the marketing side. Here, Organic growth should happen, and not push growth.

Key Strengths:

i) Strong network effects driven by our unique content and transaction flywheels:

• The end-to-end Food Services approach makes us the most unique Food Services platform globally combining the offerings of platforms such as Yelp, DoorDash, and OpenTable in a single mobile app.

ii) Technology and product-first approach to business:

• Zomato is a technology-first organization leveraging artificial intelligence, machine learning, and deep data science to continuously drive innovations on the company’s platform for the community of customers, delivery partners, and restaurant partners.

iii) Expand and strengthen the community across three businesses of Zomato – food delivery, dining-out, and Hyperpure

Key Risks:

i) Presence of Strong Competitors: like Swiggy, Domino’s, Pizza Hut, etc

ii) Regulator Risk:

• Currently, there are no risks associated with the company regarding discounts, restaurant charges, delivery charges, etc.
• Already Restaurant Body has approached to Competition Commission of India against food-delivery platforms for using strong-arm techniques against them.
• If any action is taken against this, it could create some problems for Zomato and other food-delivery companies.

iii) Entry of Amazon:

• Amazon, an e-commerce company founded by Jeff Bezos has also made entry into this food delivery segment in India.
• Amazon has already started the trial of ‘Amazon Food’ in Bengaluru.
• The entry of Deep-pocket players in the market is a key concern for the company.

iii) Losses in Previous Financial Years:

• Zomato has reported a loss in previous financial years like FY19, FY20, and FY21 of Rs. 1,010 Cr., Rs. 2,385.6 Cr., and Rs. 816.4 Cr.

iv) There are low barriers to entry in the industry and the cost of switching between offerings is low, which could have a material adverse impact on operations.

Peer Comparison:

Source: RHP, Economic Times

Valuation:

• At the upper price band of the issue at Rs. 76, the company is valued at around $9-$10 billion i.e., Rs. 75,000 Cr- Rs. 90,000 Cr. in Indian Rupees.
• This shows that the company will list as a Large-Cap company on the listing day itself.
• The adjusted sales of FY21 are 16 times the adjusted sales.
• Global Peers in China, the US, or any other major countries are having adjusted sales of 8.7 times.
• There are no listed companies in India whose business portfolio is comparable with that of the business of Zomato.

Conclusion:

Currently, this IPO is enjoying a Grey Market Premium of 20% which is around Rs. 15- Rs. 20. The company works in a dynamic business environment, where it needs to invest a lot in technology upgradation. The company can expand its footprints in Tier-II, Tier-III, and Tier-IV Cities as well showing the availability of great scope with the company. Any individual planning to invest in this company for a longer horizon should have an aggressive approach.