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Zomato IPO: Facts, Stats, Opportunities and Risks

Apr 29, 2021 9:53 AM 5 min read

Zomato has finally filed a draft red-herring prospectus with SEBI for an IPO.

The long-anticipated listing is expected to raise ₹8,250cr ($1.1bn) for the restaurant aggregator and food-delivery startup.

It could be the largest IPO to hit Indian markets since SBI Cards’ issue in March 2020. It would also be the first major offering by a consumer internet company in the country in years (and a first for the food-tech sector).

Fast Facts

  1. Zomato’s offer will include a fresh issue of ₹7,500cr ($1bn) and an offer for sale of ₹750cr ($100m) by Info Edge, its parent company.
  2. A ₹1,500cr ($201m) private placement may take place before the public issue, in the event of which the fresh issue may reduce.
  3. The company has raised $2.1bn till date. In its latest funding round, it secured $250m at a $5.4bn valuation.
  4. SEBI could take up to two weeks to review the documents, following which the date of the IPO would be announced based on market conditions. 
  5. Link to DRHP


Macro Matters

Founded in 2008 and headquartered in Gurugram, Zomato is available in 24 countries and in more than 10,000 cities globally.

Along with Swiggy, it commands a virtual duopoly (~90%) over India’s $11bn food delivery market. Its biggest shareholders include Info Edge, Uber, Alipay and Antfin.


Money Matters

Zomato is a loss-making entity as of now. In FY20, its revenue was ₹2,486cr ($333m) (+98% YoY) while total expenses were ₹4,628cr ($620m) (+36% YoY).

The company's biggest source of income is from commissions - both from listing restaurants on its feed + for food delivery services. Other sources of income include subscription services (Zomato Gold), live events and consultancy services for restaurants.

On the expense side, the company's biggest cost factors are “outsourced support costs” (which include availability fees paid to delivery partners as well as support expenses such as costs related to call centers), advertisement and business promotion, and employee benefit expenditures.

As things stand, Zomato is not an EBITDA-generating company. While the hope is that this reverses at some time, this does not look like a near-term event. In fact, the prospectus also clearly lays this out:

We expect our costs to increase over time and our losses will continue given significant investments expected towards growing our business.

How and when Zomato turns EBITDA-positive (if not net income positive) is perhaps the biggest question mark. It is worthwhile to remember that a bulk of Zomato’s growth has been catalyzed by aggressive discounting which is highly questionable over the longer term. Partner restaturents on one side (growth and percentage commissions) and the fees paid to delivery partners on the other side, remain the biggest factors to drive sustainable profitability, neither of which are as straightforward as “scale will eventually lead to profitability”. 


Reading the IPO Room: Opportunities and Risks

Zomato’s IPO comes at a unique (and chaotic) time.

The Second Wave of COVID-19 threatens to batter a feeble economic recovery. But, after a short hiccup in the early days of the national lockdown last year, the online food delivery segment has benefited from the era of social distancing and work-from-home.

Historically speaking, domestic market sentiment towards tech IPOs has been rather unpredictable. When went public in 2017, the issue was oversubscribed 4.41 times. On the contrary, the first e-commerce IPO - Infibeam’s issue - was given a lukewarm reception, with not a single mutual fund applying for shares. (Here, Zomato may benefit from the experience of Info Edge, which itself listed on the NSE and BSE over a decade ago.)

From a global perspective, response to foodtech listings has been a mixed bag. On one hand, Deliveroo’s recent IPO - also much-awaited and much-advocated - was the "worst" London listing in two decades with shares closing 26% below their listing price on the first day of trading, wiping almost $2.8bn of the company’s market cap. On the other hand, DoorDash's NYSE listing was an investor darling in December 2020, with its stock currently trading c. 33% above its IPO price.

Looking at the valuations of all three on a Gross Order Value (GOV) basis, Zomato appears to be meaningfully rich. Doordash’s GOV last year was $24.7bn and its current Enterprise Valuation is close to $45bn implying an EV/GOV of around 2x pricing in the fact that it hit an inflection point in 2020 and turned EBITDA positive. Deliveroo, on the other hand, with close to $6bn in GOV is vaued at just about 1x EV/GOV, albeit after seeing one of the worst opening day listings driven by a host of factors ranging from fundamentals to questionable deal pricing. In comparison Zomato’s envisaged $6-8bn valuation would imply a fairly steep 4.5x GOV multiple.

Zomato’s listing also comes on the heels of a red-hot period for the Indian startup sector. So far in 2021, 13 startups have become unicorns; in comparison, 11 unicorns were created in all of 2020.

Despite a bleak economic landscape, IPO activity is registering a frantic uptick. Last year, Indian companies cumulatively raised over ₹25,500cr ($3.4bn) via IPOs, an amount that was 40% higher YoY. This year (as on March 2nd), nine Indian companies made their stock market debuts, raising the highest amount for corresponding weeks since 2008 at ₹10,950cr ($1.5bn). Many more startups are expected to go public in the near term, including Flipkart, Nykaa, Delhivery, Policybazaar, Paytm, MobiKwik, Pepperfry, Byju’s, Swiggy, Ola, BigBasket and Grofers.

From a sector-specific point-of-view, Zomato enjoys a place atop India’s online food delivery hierarchy, particularly since its acquisition of Uber Eats in January 2020. The food services sector itself is a promising one, currently worth $80bn and online food delivery is expected to reach $22bn by 2025 at a 40% CAGR. Market penetration is only 7% as of today, limited chiefly to big cities, but it is expected to grow to ~20% in the next four years.

While competition is not something Zomato may be concerned about right now - Swiggy is the only other major player - that may change as Amazon is eager to have skin in the game. The e-commerce giant has expanded its food-delivery services in Bengaluru, which it began in May 2020. The last time an American company tried to make it big in Indian food delivery, Uber struggled to succeed and sold its business to Zomato. But with its low commissions, deep discounting and Prime offers, Amazon may give the Zomato-Swiggy duopoly a run for its money in the long run.


The Bottom Line

Back in July, CEO Deepinder Goyal wrote:

While COVID-19 has impacted the size of our business, it has accelerated our journey to profitability.

With premium restaurants embracing online food delivery and the sector having become essential amid the pandemic, Zomato may continue to see high demand. A successful IPO may provide it with much-needed capital to finally break-even. Moreover, due to its brand name and lack of high competition (as of now), its market debut might very well be a success.

With time, however, Zomato may face increasing challenges vis-a-vis competition from Amazon, inability to hold on to restaurants over its commission rates (which restaurants have been highly critical of) or a possible post-pandemic dip in demand. Zomato’s ambitious plans - Mr. Goyal expects the company to be worth $50bn in five years - would mean increased expenditure, which could further delay profitability.

Either way, Zomato’s long-rumoured market debut would be the first of several long-rumoured startup IPOs this year. Their performances could vindicate (or debunk?) the prospects of the country’s booming startup scene.


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