Sponsor

Zomato IPO: Should you invest, is it worth buying Zomato IPO?

Zomato IPO; Is it worth investing in Zomato IPO

The hype created in the market over the IPO, encourages everyone to apply for which ever IPO comes because it is alike the trending meme of Akshay Kumar “Double the money in 21 days”, irrespective of knowing whether it worth your investment or not.

Zomato IPO: Should you invest, is it worth buying Zomato IPO?
The most awaited and anticipated IPO is on its way, Zomato IPO, which will help Zomato in expansion of capex activities, and making great infrastructure, etc.

The price band, shares, lot size, valuation and date have not been decided yet but Zomato has filed DRHP to SEBI to apply for an IPO.

A sudden ocean of IPO had helped investors hitting jackpot like “Nazara Technologies, Barbeque Nation, Suryoday, IRFC, RailTel and several other like Homefirst finance”.

So, what happen is that whenever there is an IPO comes after long time then there will be more chances that you will be hitting Grey market premium on that IPO, but to carry on with that stock for value investing you must have a vital view for the long term over the company.

Which is best described in the DRHP filled by the company.

DRHP

DRHP is draft red hearing prospectus which is like an application submitted to SEBI (Regulatory body) which includes the highly important information about:

  • Company’s history
  • Company’s Financial statements (Past 3 years Balance sheet, Income statements and cash flow statements)

  1. Company future goal
  2. Target with wealth gathered
  3. Promoter holding
  4. Investments and funding

Zomato IPO

Zomato IPO is much anticipated IPO of the year, which is in the news from last 1 year. DRHP filled by Zomato, includes application for IPO for raising 8,250 crores including 7,500 crores of fresh issuing and 750 crores of Offer for sale (OFS) by Infoedge Limited (Mother company of Naukri.com).

The expected price of Zomato IPO may be around 75-90 rupee, as from the total number of outstanding shares listed as 666 crores.

The company may raise pre-IPO offering worth account 36,000 crores funds ($500 million). Valuing the company close to $6-$8 million including IPO raising.

The price band, shares, lot size, valuation and date have not been decided yet but Zomato has filed DRHP to SEBI to apply for an IPO.

Zomato is food delivery operator in India, founded in India by Pankaj Chadha & Deepinder Goyal (Goyal being the CEO of Zomato with 5.51per cent stakes in the company) with business expansion in over 23 countries including Australia, Indonesia, UAE, USA, Philippines, Turkey, Malaysia, Poland. Whose 90 per cent of the total top-line revenue generated from the mother country India.

Company is associated with food delivery operations, but also generates the revenue from subsidiary business-like Cloud kitchen, Hyperpure and Advertisement.

Master: What to read in Auditor's report

Understanding business model (Zomato)

In 2008 Pankaj Chadha and Deepinder Goyal founded Zomato as the platform which have the Restaurant discovery feature and the platform which named foodiebay gives the customers to view and book dining at their favourite restaurants and now it is one of the leading food delivery partners of the restaurants.

Zomato IPO: Should you invest, is it worth buying Zomato IPO?

The Gurgaon based start-up recognize that they have almost every details of the restaurant which a user wants, have the record of famous dishes of restaurant then why cannot company start delivery of food. Then the company jumps into the business expansion of food delivery in 2015.

Also read: (8 important types of corporate actions including IPO)

Where the company have the competitors as Uber eats, ola café, runnr, Food Panda, Swiggy, TinyOwl and Scootsy.

Food delivery company Zomato has 1.1 crores of active customer acquisition, with 3.5 lakhs restaurant associated with it in over 500 cities. The company is competing in market with Swiggy being the biggest pear and Amazon as the newcomer in the field.

The reason why Zomato fits in the market is that it fills the gap between food ordering enthusiastic customers and delicious food making Restaurants. From the very beginning of the company Zomato is the largest food-focused restaurant discovery platform which provides reviews, location, booking, other crucial information about the restaurant and enable restaurant owner to market their services on the platform.

Having this much back support helps Zomato to sustain in the business, and as of now the company is having negligible debt with the total orders in FY20 is 403 million order with gross order value of account 11220.9 crores, but this figure declined in the last 9 months of 2020 as of the pandemic strikes and makes the value to 155 million order with gross order value 6169.9 crores.

Gross order value is the sum of the value of total orders make completed by the company.

Also, the company has improved the average value of the orders ordered over the platform, which is rupee 298 before pandemic, and 398 after pandemic.

The company had seen un expected nature of order placing during the first 2 quarters of 2020 as compared to 3rd quarter of FY2020 where the gross order value climb to the previous high by making 27 per cent increment.

How Zomato earns?

Zomato is not only doing business expansion with B2C but also with B2B, like they have them dine out, Zomato pro and food delivery charges for B2C revenue sources on the other hand they are dealing with B2B by doing Restaurant branding and publishing the restaurant with hyperpure assured on the application.

Zomato mainly have 5 sources of earning:

  • Dining out
  • Restaurant marketing
  • Zomato pro
  • Hyperpure by Zomato
  • Food delivery charges

Dine-in

Having started with the business of Dining out carrying forward and still making wealth from the unsustainable concept is what Zomato doing doubtlessly.

Dining out feature of Zomato provides the customers to search the restaurant near them, view the food menu and book their dine at their chosen restaurants.

As of now they have more than 3.5 lakhs restaurants listed in over 500 cities which in return helps them to have most of the data of the restaurant in the city, and it is a never-ending loop:

  •  More restaurants get listed on the platform
  •  In return helps the user to track for dining out
  • Customer acquisition, satisfaction and trust helps Zomato to register more and more restaurants on their platforms
  • In turn helps the customers to select from the varieties
  • Helps the Zomato to earn more profit and have more facility on their platform.

It results in never ending loop which helps Zomato to expand their business.

Restaurant marketing

Zomato also have restaurant branding on their platform, in which they feature branded and sponsored restaurant. This is not limited to only restaurant sponsoring, they are the sponsors and branding partner of 1 home team for an IPL season 2021.

Restaurant listing, dining reservation and uploading restaurant reviews are the special executions of Zomato which its peer is not applying in business expansion.

Zomato pro

Zomato also have the exclusive paid membership program which provides customers some flat discount over the selected restaurant and dine out options with only 299 rupees for 3 months, it is like Amazon prime worth 999 rupees for 1 year covering every paid premium service given by Amazon.

As of 31stDec, 2020 Zomato has 1.4 million active members on the platform enjoying their exclusive paid membership.

Hyperpure by Zomato

This part of Zomato revenue generation is comes under B2B where Zomato have its 1 subsidiary company Hyperpure dealing with the purity of food and assured of quality of raw material of food grains, rice, wheat, and other important farmed products.

The company provides the farmed products to fork of restaurants owner on which both restaurant and customers can rely. Zomato guarantees that Hyperpure delivered high quality, fresh farmed grains, fruits, and vegetable directly from the farmer.

The restaurant to adopt this facility must give some fixed charges to Zomato and in return Zomato provides the interface assured sign of hyperpure under restaurant name on dashboard.

As of 31stDec, 2021 Zomato have more than 6,000 restaurants listed in over 6 cities of India.

Food delivery

At last, comes food delivery infrastructure, the 90 per cent revenue of the total Zomato top line is converted through delivery charges which Zomato applies on your order, in ordering three parties are involved i.e.

  1. You the customer
  2. Zomato the mediator
  3. Restaurant the server

The food delivery charges seem to have gone through your pocket but its not only you it is also the restaurant owner, Zomato also forces restaurant owners to push down prices and give them the commission for delivering their food.

Most of the time Zomato successfully wins the agreement between them but on winning of Zomato, restaurant must cut their profit, and to make same amount of profit restaurant owner needed the orders in bulk. But Zomato will not be able to convert its leads for them because their customers have lot more choices available rather than 1.

So, it is a win-win situation for Zomato and loss in every case for restaurants.



From the business model through Zomato has expanded it seems like only Zomato is making wealth, from the pocket of restaurant owner as well as the public uses their platform.

Read: Which is India's highest dividend yielding stocks in 2021

Financials

Although the company is almost the debt free company, but the company is still in loss after submitting 3 years of balance sheet and income statements to NSE, it is important to notice that this time how the SEBI is approving the IPO while in the rules, it is clearly mentioned that the company should be profitable with last 3 year of balance sheet and profit and loss statements.

Master the art of fundamental analysis,[read full article]

The bottom line which is the revenue keeps on increasing posted amazing outstanding results in Fiscal year 2020, where the revenue seems to be hitting all time high for FY2020 then posted the lowest of 2 years, realising the pain of pandemic.

The pandemic affects the revenue for only 1st and 2nd quarter then after growth return to its original rates of FY 2020, stunned everybody.

Zomato IPO: Should you invest, is it worth buying Zomato IPO?

The top line also has the same trend covering the bottom-line trend it starts rising from the FY 2018 then rises to FY 2020 and astonish by the Pandemic affect, resumes the growth from the 3rd quarter.

                  Year

Revenue (in crores)

               FY 2018

466                  

               FY 2019

1,312

               FY 2020

2,604

               FY 2020

1,301


Zomato IPO: Should you invest, is it worth buying Zomato IPO?


According to CLSA, the average size of food industry will about burst and expected to have $11 billion in FY 26 from $3.5 Billion in FY2020 which includes increasing number of internet penetration, increasing number of people ordering food daily and according to the studies it had shown that total number of internet customers from FY 2015 to FY 2020 has just doubled in numbers. Which gives real boost to the company.

Zomato just turns profitable

Company is managing its reserves and surplus, so that they became profitable, understanding the business, the company had burned account 13,000 crores of funds in the start-up. So became profitable over the Indian market is the only thing everyone wants with the company.

Company just turns profitable in the FY 2020 where the company had cut down its expenses and marketing cost and increases delivery expanses in the manner that equilibrium between both can be maintained.

Financials


FY 2019

FY 2020

Gross order value (GOV)

1,12,209

61,699

Orders

403

155

Average order value

278

398

Commissions & other charges

49.6

62.8

Delivery charges

15.3

26.8

Total revenue

58.9

89.6

Delivery cost

52

44.6

Discounts

21.7

7.3

Other variable costs

15.7

14.8

Total cost

89.4

66.7

Net (profit/loss)

-30.5

22.9

Zomato major stakes holders

Infoedge the company strongly believes in digitalisation has already backed the company from the decade, in 2008 info-edge had invested 523 crores and is the major stake holder in Zomato with stakes being 18.9 per cent.

Jack Ma’s backed Ant Financials has also invested a big chunk of account 3,242 crores the investor, the Zomato in receiving investments from the foreign capital investment firm has mentioned that they are subjected to foreign direct policy for investment and will have to share the information if needed with the investment firms.

Following Uber HV is having 9.13% stakes, Tiger Global having 6%, Sequoia Capital being partner of 5.96% stakes and Deepinder Goyal is major individual promoter with 5.51% stakes in the company.

Zomato IPO: Should you invest, is it worth buying Zomato IPO?

Zomato v/s Swiggy v/s Amazon

Zomato’s biggest competitor is Swiggy, only dealing with the delivery services, delivery of food, medicines, alcohol, meat, and grocery. Almost at the same time both Zomato and swiggy had started their business expansion.

Swiggy back in 2014 and Zomato in 2015, but now Amazon is testing itself to be eligible for the services. Like they have started their services in Bangalore, with 2,500 restaurants as partner v/s the Zomato 15,000 restaurants partners in India.

On papers Swiggy seems to be more profitable and valuable than Zomato, but the definiteness of Swiggy limit their growth in comparison with Zomato.

Zomato and swiggy both following different strategies, Zomato trying to put itself in every aspect of food delivery infrastructure whether it is dine-in, restaurants review, cloud kitchen, and Hyperpure which deliver the freshly prepared grains to restaurants directly from the farmers.

While the Swiggy only following the trend of delivery services, delivering every object if possible.

If compared from the US market, Doordash is delivering food in the US market, Grubhub is considering the US restaurants for better dine-in services, but what Zomato is doing they are doing everything in India,

  • Zomato is delivering food (same as Doordash)
  • Zomato is doing Dine-in also (Grubhub)
  • Zomato has Hyperpure also
  • Zomato is on its way to Cloud Kitchen

Amazon entered in food delivery business expansion and is very familiar with the delivery services in India, the amazon prime featuring its food servicing in India.

Currently it started with delivering food for its employees in over 2,500 restaurants. If the tested trial completes its way, then definitely Amazon can be a game changer competitor of Zomato in India.

FY-19 (in crores)


Zomato

Swiggy

Revenue

12

11

Advertising expenses

12

8

Employee cost

5

5

Total expenses

34

36

Net cash flows

-17

-23

Net (profit/loss)

9

23

 

But in turning Zomato to be profit makes it now more comfortable in front-off its peer and gives them a reason to raise for the IPO.

FY-20 (in crores)


Zomato 

Swiggy

Revenue

23

25

Advertising expenses

13

10

Employee cost

6

11

Total expenses

46

66

Net cash flows

-21

37

Net (profit/loss)

25

38

But having entries in different business of food serving edged Zomato to rethink and ensures the profitability of the company.As Swiggy is totally into the business of delivery gives them more time and wealth to invest in the business expansion than Zomato, so its result is reflecting in their balance sheet and peer comparison, Swiggy is winning more orders then Zomato if topic is food delivery.

Should you invest in Zomato IPO

We have tried hard to put information in-front of the readers, so the reader may the company accordingly.

Zomato is leader in food delivery business and till now have only peer Swiggy present in space. Where the Zomato is present subsidiary business expansion of food serving, Swiggy’s business model focused on delivery only. Refusing the fact that what the Zomato is doing all big three businesses in food ordering which in US, three different Companies are serving.

But still there are things which you must consider before making your decision, it includes:

Promoter and Investee decreasing their stakes

Infoedge had invested 523 crores in 2008, for the stakes that worth 18.9% today, the Infoedge is king in recognising potential digital start-ups, led by the decisions of Naukri.com, Makemytrip which is listed in US stock markets (NASDAQ), Policybazar which is the India’s digitally grown start-up having no physical branch present at the time of listing, where they knows the process of wealth creation.

The company has already booked the profit of 325 crores, and now offering OFS (offer for sale) through which selling the stakes worth of account 750 crores funds. And hence booking double profit on invested amount.

Jack ma’s funded Chinese company Ant Financials also a major stakeholder in Zomato 16.53% stakes. Previously Ant Financials had maintained their stakes close to 23% but then decreased to 16.53%.

Last year Zomato had raised 250 million$ from Tiger Global and Kora, touching their valuation between 7-8 Billion$.

Sequoia Capital has stakes approximate to 5.98% and Deepinder Goyal as the acting CEO have stakes close to 5.51%.

Both Deepinder Goyal and Sequoia capital decreased their stakes under the completion of certain condition, told by the Zomato interview.

Bottom line is that if the company has potential to be a multi-bagger again then why promoter and investors are selling and decreasing their stakes, and if selling is what promoters wants to do then what is the other good time when the hyped created by the company.

Infoedge understands the digital ecosystem deeply, then why is selling their stakes from the company.

Network effect & Social media effect

For listing their restaurant on Zomato is a compulsion for the restaurant’s owner, as their peer are listed and gaining lot more social media presence.

For every month or 2-month Zomato is trending on twitter, sometimes due to propaganda and sometimes due political issues, so as they have active social media popularity, they have more chances of winning your order.

Grubhub finds no scope

Grubhub is the leading company of US, which offers dine-in services in US, according to one statement by Grubhub which says: Food delivery business has no future. The company no scope in process of wealth creation through Food delivery business. The industry legends giving this kind of feedback has significant importance and is an example of Indian Ecosystem as well. Read the Full article here.

Why early comers failed?

It has been said that to be successful in any business start it as early as you can, so why casualties happen with:

  1. Food Panda (2017) sold to ola café,
  2. Ola cafe closed in 2019.
  3. TinyOwl started in 2014 then closed in 2016
  4. Scootsy started in 2014 then closed in 2016
  5. Uber eats started in 2017 then sold to Zomato in 2020
  6. Swiggy is the only active competitor of Zomato.

From where Profit comes?

From far distancing business seems to be profitable for all members present in the ecosystem where everyone is benefiting. But by understanding their business, we came to the point that profits come through delivery charges we pay and by pressuring down restaurant owners to cut down prices of their served product.

Zomato is charging money for delivering food at your doorstep, you are doing payment to Zomato for a 1–2-mile walk which is again important for you.

Cloud Kitchen

Cloud kitchen may be a game changing business for Zomato where they help restaurant owners to setup their branches to other distant regions, by providing Infrastructure, hiring, loans, etc, like services.

Useful links

What to read in Auditor's report

Which is India's highest dividend yielding stocks in 2021

(8 important types of corporate actions including IPO)

Art of reading of 5 types of Financial statements.

Post a Comment

0 Comments