About the company:
InfoEdge backed Food Technology Company Zomato Ltd had been doing rounds for an IPO since the start of 2021 is finally launching its whopping Rs.9,375 cr IPO. This IPO is set to begin a new trend for start-ups to launch their IPOs after SEBI introduced Innovators Growth Platform encouraging start-ups to go public.
Delhi-based Zomato Ltd is planning to raise a whopping Rs.9,375 cr via a Fresh Issue of Rs.9,000 cr and Offer for Sale of Rs.375 cr by Info Edge, which currently holds 18.4 percent stake in Zomato. The company stated that it aims to to use the net proceeds from the public issue to fund its organic and inorganic growth which is estimated to be around Rs 6,750 crore and the rest will go towards general corporate use. The IPO will open from 14th of July and will close on 16th of July 2021 and the price band is fixed at Rs.72 – Rs.76 per share for a lot size of 195 shares per lot bid.
Introduction:
Zomato Limited (“Zomato”) was incorporated on January 18, 2010 as “DC Foodiebay Online Services Pvt. Ltd.” Zomato is one of the leading Food Services platforms in India in terms of value of food sold, as of March 31, 2021. During Fiscal 2021, 32.1 million average MAU visited their platform in India. As of March 31, 2021, they were present in 525 cities in India, with 389,932 Active Restaurant Listings. Their mobile application is the most downloaded food and drinks application in India in each of the last 3 fiscal years on iOS App store and Google Play combined. Zomato has a footprint across 23 countries outside India and is present in 525 cities in India and it essentially aims to focus on the Indian market going forward. In addition Zomato has one of India’s largest hyperlocal delivery networks in terms of number of delivery partners as of March 31, 2021. Their delivery network collected food from their restaurant partners and delivered it to customers with a median delivery time of less than 30 minutes in Fiscal 2021.
BUSINESS OVERVIEW:
Zomato derives revenues from 4 different streams of businesses:
Food Delivery: This is Zomato’s primary business which contributes to majority of its revenues..
Food Delivery Economics: Break-up of how revenue is collected by Zomato from the business.
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Revenue Schedule
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Cost of Food (net of restaurant
costs)
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ADD
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(+) Commissions charged by
Zomato to Restaurant
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(+) Advertisement Fees earned by
Zomato from Restaurant
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(+) Packaging + Delivery Charges
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LESS
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(-) Zomato Discounts
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(-) Delivery Costs (passed
through to customers)
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(-) Tips and Additional Fees
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Zomato has consistently gained market share over the last four years to become the category leader in the food delivery space in India in terms of Gross Order Value (GOV). It has seen a rapid growth in food delivery in India with Orders increasing by 13.2 times from 30.6 million in FY2018 to 403.1 million in FY2020 and the GOV has been growing 8.4 times from Rs 1,334.14 crore in FY 2018 to Rs 11,220.90 crore in FY 2020.
Dining Out:
Customers use dining-out offerings to search and discover restaurants, read and write customer generated reviews and view and upload photos, book a table and make payments while dining-out at restaurants. Zomato claims to be the preferred destination for dining-out search and restaurant discovery in India. As of December 31, 2020, Zomato had 350,174 Active Restaurant Listings on their platform and in Fiscal 2020, 157.0 million units of Customer Generate Content (CGC) was generated on their platform. Zomato also collects Ad fees from restaurants to help them increase their visibility on the platform. This becomes an additional source of income for Zomato..
Hyperpure (B2B Supplier):
Hyperpure is the food supplies offering for restaurants in India. Zomato sources food supplies directly from farmers, mills, producers and processors to supply to restaurant partners. Zomato started Hyperpure in 2019. In the month of December 2020, the company supplied to over 6,000 restaurant partners across six cities in India. Hyperpure helps Zomato increase their engagement with restaurant partners on their platform, and in turn retains and grows a connection with them which helps build loyalty
Zomato Pro:
The paid-membership program, Zomato Pro, unlocks flat percentage discounts for Zomato’s customers at select restaurant partners across both food delivery and dining-out offerings. These discounts are available to customers on all days in a year (except during a few pre-determined festive days) and the Pro Restaurant Partners choose and fund the percentage discount available to Pro Members at their restaurants. Customers become Pro Members by paying a membership fee. The program also allows Pro Restaurant Partners to market themselves to a select audience.
The company has 3 primary key partners:
Customers:
Average monthly active users are at 29.6 million and average monthly transacting users are at 5.8 million as of December 2020; Of this, 1.4 million customers are Zomato Pro members.
Delivery Partners:
These are the delivery partners which provide the key service of delivering food products from the restaurant partner to the customer. Zomato had 161,637 active partners as of December 2020.
Restaurant Partners:
As of December 31, 2020, there were 350,174 Active Restaurant Listings on Zomato in India, of which 132,769 restaurants were also Active Food Delivery Restaurants during the month of December 2020. Of this, 25,350 restaurants are Pro Restaurant Partners.
Operational Metrics:
The order value has seen a decline from its FY 2018 levels but has since been rising, with the average value per order reaching Rs 397 per order as of December 2020. As the order value grows in size, Zomato can scale up its profitability as other costs get covered.
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Unit Economics (Rs per order)
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FY20
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FY21
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Gross Order Value (Mn)
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112209
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94,829
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No of Orders (Mn)
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403
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239
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Average order Value
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278
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397
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Commissions & Other Charges
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43.6
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62.8
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Customer Delivery Charge
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15.3
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26.8
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Total Revenue
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58.9
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89.6
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Delivery Costs
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52
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45.7
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Discounts
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21.7
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8.3
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Other Variable Costs
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15.7
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15.3
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Total Costs
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89.4
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69.3
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Profit/Loss
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-30.5
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20.3
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As can be seen from the above table, the company has been seeing improving unit economics wherein it turned profitable in its operating activities for the FY21 as against 2020. There are primarily two attributes that resulted in profitable unit economics. First, the company saw an increase in the average order value over the previous year from Rs 278 to Rs 397 (up by 43 percent) which resulted in higher revenues per order. The second element came from a sharp reduction in discounts as Zomato undertook costs control measures and curtailed its discounts.
Due to the pandemic, a lot of individuals returned to their homes which could have eventually led to an increase in the size of the order. Along with this hygiene concerns as well as the fact that many smaller size restaurants were shut resulted in customers ordering from restaurants in mid to premium segments. While unit economic profits have turned positive, the company continues to report a net loss due to costs associated with marketing, branding and other fixed operating expenses.
A large part of the costs arises from the advertisement and outsourced support staff costs which have been severely impacting the bottom-line of the company. As can be seen from the below mentioned table, these costs peaked out in FY19 and have since been forming a lower percent of the revenues of Zomato. The primary driver is the fact that the company is curtailing its advertisement costs in the form of lower discounts offered to customers as other efficient cost management strategies being undertaken. As of December 2020, the ad and support staff costs formed 51.5 percent of revenues as against 195.5 percent for FY 2019.
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Percent of Revenue
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FY19
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FY20
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FY21
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Employee Costs
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46 Percent
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31 Percent
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37 Percent
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Advertisement Costs
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94 Percent
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51.4 Percent
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26 Percent
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Outsourced Support Costs
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101.3 Percent
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80.4 Percent
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30 Percent
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Advertisement costs include platform-funded discounts, marketing and branding costs, discount coupons given to customers, and refunds made to restaurant partners. Outsourced support costs include the availability fee that the company pays to delivery partners as well as support expenses, such as costs related to call centres.
Financial Performance and Metrics:
Zomato has posted a strong growth in its revenues over the past 3 years. The revenues have grown at a CAGR of 136 percent from FY 2018 to FY 2020 (Rs 466 crore to Rs 2,604.7 crore) while EBITDA has grown at CAGR 211 percent over the same period (Rs 175.5 crore to Rs 1,696.9 crore) owing to improving unit metrics, economies of scale and cost efficiencies. While the growth rate has been phenomenal, Zomato saw a severe impact arising out of COVID-19 in 2020 which has resulted in lower revenues for the 9-month period in FY 2021.
In Q1, the company saw a sharp decline in the Gross Order Value (GOV) as lockdowns were enforced across India and people undertook high caution. During this period, a lot of restaurants also shut down owing to COVID-19 restrictions further limiting the services offered by Zomato. Despite the lockdown impact, the company quickly recovered from the dip as indicated by its GOV. The GOV went from Rs 1,093.6 crore in Q1FY21 to Rs 2,981 crore in Q3FY21, indicating a growth of over 170 percent in just 2 quarters. This recovery was driven by increased food delivery ordering as people chose deliveries over dining out along with restrictions continuing in place for dine outs.
Zomato Financial Performance schedule:
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Ratios
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FY19
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FY20
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FY21
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Return
On Equity
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-39.3 Percent
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-339.2 Percent
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-10.1 Percent
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ROCE
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-84.5 Percent
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-109.6 Percent
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-7.4 Percent
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EV/EBITDA
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-1.04
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-0.15
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-15.4
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OCF/EBITDA
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78 Percent
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93 Percent
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218 Percent
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As can be seen from the above schedule, Zomato has delivered an erratic set of numbers with negative ROEs owing to the net losses posted over the past couple of years. On the other hand, the company has been delivering highly volatile but positive ROCEs as it continues to generate an operating profit.
Zomato continues to deliver fast-paced growth and as it captures further market share and increases its penetration, it can achieve its economies of scale and deliver profits soon. Yet, it is too early to tell the same as it faces intense competition in the market from peers such as Swiggy and Amazon Food which are also engaged in the same business. Another area of competition also emerges from the need to constantly innovate and keep the platform updated which needs to be done effectively to continue to deliver superior customer experience as against its competition. With the constant need for innovation, Zomato will continue to invest heavily towards development in order to maintain its position in the market.
With the Indian consumer always seeking the best deal and discounts, customer loyalty and retention continue to be a core focus of the company. In order to deliver profitable results, it needs to undertake cost control measures while remain competitive in the marketplace. As indicated by Zomato, they expect costs to increase over time and losses will continue given significant investments expected towards growing the business. The management looks to continue to expend “substantial financial and other resources on, among others, advertising and sales promotion costs to attract customers and restaurant partners to their platform, developing the platform, including expanding the platform’s offerings, developing or acquiring new platform features and services, expanding into new markets in India, and expanding the delivery partner network.”
Risks:
• Highly Competitive Landscape (Swiggy & new comer Amazon)
• Negative impact from discounts
• Restaurants undercutting Zomato
• Dispute with NRAI (National Restaurants Association of India)
• Impact from Potential COVID-19 waves
Conclusion:
Given the fact that Zomato has a strong growth portfolio and hugely positive investor sentiment backing it, the IPO is going to attract strong attention. To conclude, Zomato’s valuation on P/E is not possible as it’s a loss making company but as per its Price to Sales it looks attractively priced among global peers with a P/S of 20.5x as against China’s Food Delivery company Meitun (25.x) and US-based Door dash (45.x). The pandemic has made food delivery platforms look more attractive because of acceleration in demand during this period but whether this can sustain over the longer term still remains to be seen.But for now, We recommend Investors to “Subscribe to this IPO only for Listing Gains”.
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