Food bearing, discounts lading, Zomato dressed in red-and-white like a Santa Clause has not only been a darling for its customers but also for the Indian Startup ecosystem now. The day has come when we witnesseth an Indian tech Unicorn filing for an IPO as Zomato seeks $1.1B (₹ 8,250 Cr).
Zomato's business is huge today. It has various streams of income from restaurant discovery to food delivery. It has also undertaken backward integration to strengthen its position in the supply chain. Read our special issue on Food tech to learn more.
But when we read the headlines, we started wondering, is it all rosy? Or are we missing something here? So, we dug deeper into Zomato's prospectus and here's what we found intriguing:
What's intriguing 1:
One of the biggest reasons we believe led to Zomato’s IPO is it finally cracking the formula for achieving positive unit economics (at least that’s what they say). It basically means that Zomato is now making some money per order as commissions earned from restaurants + delivery charges now exceed the amount they pay for delivery, discounts, and other direct costs (Finally!).
What we're still wondering:
Unit economics is derived without including fixed costs like salary, rent, marketing and other general expenses. (Oh boy!) Zomato still loses 50 paise on every rupee it earns as revenue (Read that again) compared to 7 paise lost on every rupee earned as revenue by it’s peer - DoorDash (Online Food Delivery Company listed in the USA).
What's intriguing 2:
As per Zomato’s prospectus, its latest 9 months revenue comes to ₹ 1,367 Crs ($183M).
What we're still wondering:
Again, comparing it with DoorDash’s IPO in the USA that took place in 2020, it’s comparative revenue before IPO was $1.9B (for 9 months period) and it got listed at a valuation of $38B. As such, it gives us an enterprise value-to-revenue ratio (EV/R) of 15 times. If we multiply this EV/R ratio with Zomato’s revenue, its fair value comes to $ 3.7B only. Now the word on the streets is that Zomato will be listing at upwards of $8 B. Will Zomato be able to command such a high premium in price at the IPO? And if it does, how long will it be able to sustain it?
What's intriguing 3:
The Pandemic forced professionals and students to return to their Tier II & Tier III hometowns. This led to a surge in demand for order-in food in such cities and onboarding local restaurants became a cakewalk for Zomato. Outcome: It gained massive market share in these cities with low (read:nil) customer acquisition cost and very low delivery cost.
What we're still wondering:
Will Zomato continue to enjoy sustainable demand in Tier II and Tier III towns, once the dust settles and the WFH people retreat to the big cities?
What's intriguing 4:
As the pandemic surged, even premium restaurants ran to Zomato to keep their kitchen stoves burning. Such premium restaurants offered higher commission to Zomato thus driving up profitability and unit economics. (Woohoo!)
What we're still wondering:
Total addressable market in India is HUGE. However, most consumers are price sensitive. They like ordering heavily discounted food at home and spending surplus while going out whenever they can. Will Zomato continue to earn from the premium restaurants it onboarded once the pandemic settles, and people feel safe to dine out again? And will they still master in achieving positive unit economics without the commission from these premium restaurants?
What's intriguing 5:
Deprived of fancy food and tired of domestic chores, customers became price inelastic. Zomato was quick to perceive this shift as it lowered discounts by almost 66%.
What we're still wondering:
Will Zomato be able to maintain active engagement on its app without the discounts when things fall back to normalcy? Especially when Amazon and Google are also looking to enter the FoodTech industry in India.
What's intriguing 6:
A huge rejoice to the investors was that Zomato was able to surpass the pre-pandemic Gross Order Value even with almost an entire quarter of no business activity.
What we're still wondering:
Expected number of users on Zomato should have also gone up with the stay-at-home lockdowns. But the metric went the other way. There was a sharp decline in transacting users by almost 50%. Does it mean that in a discount-less world, Zomato is able to retain only half its user base?
What's intriguing 7:
Out of the total IPO proceeds, only 9% will go to the existing shareholders as an offer for sale (InfoEdge) whereas the rest 91% will be used for future expansion activities. This shows that most of the investors continue to trust Deepinder Goyal and his team at Zomato.
What we're still wondering:
Zomato already sits on a huge cash pile of ₹ 2,500 Cr, as per the prospectus. And now it’s raising even more money from the public? Given it’s history of failed business takeovers, who can ensure that the money will be spent prudently?
Despite the huge list of questions still unanswered, we believe that the IPO will see the light of the day at the back of soaring capital markets and the unhindered IPO frenzy that India Inc. has witnessed in this past year. (Nazara for example was subscribed 175 times and EaseMyTrip was subscribed 159 times).
Above all, the biggest reason to be excited about is that Zomato is the first e-commerce tech startup of India to take the bold step of public listing and we are sure that a host of startups will follow suit in months to come. Zomato has the largest pie in the Indian FoodTech Industry and we can’t wait to have a pie of it.
PS: The view's expressed are not to be construed to provide any buy or sell recommendations.
This article is a part of the May'21 edition of our Startup Newsletter. Here's the complete publication:
