Zomato

Verdict: An Expensive Serving!

Rs 9,375 cr IPO:

• Fresh issue of Rs. 9,000 cr for organic and inorganic growth over 5 years
• Rs. 375 cr OFS by largest investor InfoEdge holding 18.5%

IPO Date: Wed 14^th Jul to Fri 16^th Jul 2021

Price band: Rs. 72-76 per share

MCap (at upper band): Rs. 59,623 cr, implying 16% dilution. 

Allocation: Only 10% to retail due to past losses

Listing Date: 23rd July 2021

Covid Effect: Lower Loss

FY21 revenue fell 23% YoY to Rs. 1,994 cr, as number of orders declined 41% YoY to 240 mn, but order value increased 43% YoY, to almost Rs. 400. Higher frequency and ticket size of food delivery orders due to stay at home during covid, witnessed by global peers as well, along with lower customer discounts and fees to delivery partners (down 61% and 72% YoY respectively) narrowed company’s FY21 net loss before exceptional items by 79% to Rs. 490 cr from Rs. 2,386 cr loss in FY20.

Unit economics of food delivery business (~75% of revenue) turned positive Rs. 20 in FY21 from negative Rs. 30 YoY, due to Rs. 19 higher restaurant commissions, Rs. 12 higher delivery charges from customer and Rs. 13 lower discounts. However, sustainability of unit economics is to be monitored given (i) precedence of growth over margin to deepen penetration (ii) hyper growth to normalise on economy opening up post-covid, as both order value and frequency moderate (iii) competitive intensity on captive restaurant apps and absence of pricing power in the duopolistic delivery industry.

Funding New Investments for Growth

For growth reasons, company made ~15 acquisitions in past but incurred losses on closure (kitchens, office catering) or write downs (7 overseas business). Going forward, it plans to scale up nutraceuticals, sports discovery, grocery (acquiring 9% in Grofers for Rs. 740 cr) ventures among others, which may keep profits at bay for a few more years. While grocery may be a large complimentary opportunity, it is an extremely competitive space with deep-pocketed biggies like Amazon, Flipkart, RIL, Tata vying for a slice of the pie. Zomato, without any identifiable promoter and limited availability of large PE cheques post-listing, may lack the financial wherewithal to replicate its success of food delivery in grocery.

Unjustified Pricing for Food Delivery Platform

Expected market cap of Rs. 59,600 cr is 27 times FY21 revenue, against a global range of 3-20x, averaging 9x for DoorDash, Delivery Hero, Deliveroo, Meituan, Grubhub. US listed peer DoorDash’s revenue, 10x of Zomato, tripled in CY20 with positive EBITDA, whereas Zomato’s revenue declined 23% in FY21 with EBITDA not likely to be in the black, even in next 2-3 years. With 2x market share of competition and high growth rates on a large base, Door Dash commands mcap of USD 58 bn and revenue multiple of 20x. If lower domestic penetration calls for a premium to Zomato, 27x for revenue multiple is unfounded, given an equally strong domestic competitor and an unclear path to profitability, even after over a decade of existence. Purely for reference sake, platform player like Indiamart, clocking 60% EBITDA margin, is ruling at such high revenue multiple, which we anyways find difficult to justify.

Fear of Missing Out (FOMO): No basis of Investing

Started off as a restaurant menu listing company 12 years ago, Zomato has evolved into a food delivery business model only in past 4 years. In the backdrop of fast changing tech landspace, taking a 10 year view on the stock to justify present sky-high pricing becomes foolhardy. IPO valuation is 47% premium to last fund raise 6 months ago, with primary component being increased by 20% from Rs. 7,500 cr to reportedly tap high frenzy for the first tech unicorn listing in India. However, important to cut the hype and take a fundamental earnings view, as valuation based on demand supply may be short-lived. In mature markets of US and China, delivery platforms at max clock mid-single-digit margins, implying modest margin although a scalable business.

A Word of Caution:

Investors have, for long, been mesmerized by I-Bankers on new generation concepts, mad rush for which was seen for R Power IPO in Jan 2008, when unanimous call of all I-Bankers was a screaming buy. Now, no one is questioning them on that issue! 

Positive PAT or ‘Bottomline in Black’ is the ultimate mantra for all investors, which is unlikely to be seen here atleast for the next 5 years. Thus, investors may very well lose frenzy for these so called ‘new generation businesses’ over the next 12-24 months, and return to their senses. ADAG stocks are proof of that.

Conclusion:

Growth in food delivery/dining is secular, and Zomato is trying to play it via a First Mover IPO. But, evolving business model, requiring growth capital for scale up and new verticals is unacceptable, which coupled with a competitive landscape and unjustified IPO pricing making the risk reward unfavourable.

Hence, one can skip the IPO.  

Grey Market Premium (GMP) of Zomato: Grey Market Premium of Zomato is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.