If you have ordered food online at any point of time in India, it is very unlikely that you have not heard of Zomato, or used it. Like most of ecommerce and digital players, Zomato has a long gestation so it is still making losses. But that is hardly the game when you invest in the Zomato IPO. Zomato is approaching the IPO market in India to raise Rs.9,375 crore from the retail and institutional investors. Out of this amount, Rs.9,000 crore will be the fresh issue portion and Rs.375 crore will be an exit route for Info Edge.
InfoEdge, one of Zomato’s earliest investors, is looking for a partial exit with a ₹375 Cr. offer for sale (OFS). The rest (₹9,000 Cr.) goes to Zomato. Besides, when a loss-making company (like Zomato) opts for IPO, it can raise only 25% of the offering from retail investors & HNIs (as against 50% usually).
But that’s not what we want to talk about today. We’re here to lift the veil and help you make an informed decision. Shall we?
At the outset, here’s a bird-eye view of the industry…
The Food Delivery Market
What does this industry sell? Food? Nahh. It’s ‘convenience’. They’re just aggregators fetching you, say, a plate of luscious biriyani from Arsalan, so that you don’t have to. Which brings us to a question- Can they have loyal customers?
Most probably not. You're more likely to be loyal to a restaurant and not a platform. What if your favorite restaurant previously listed in Zo moves to Sw? What if Zo provides you a dish at a 10% discount while Sw at 20%? Will you not switch? Is that even a question? Of course, you will. Thus, in this industry, customer loyalty is hard to build and can’t be considered a strong moat.
However, it’s a low-margin business. Or rather, margins and revenues don’t have a strong correlation. Because the only way you can scale up sales is by offering value-for-money dishes with lesser commission and deeper discounts, which means taking a hit on the profits.
A quick look at the Zomato Financials
Here is a quick look at the financials of Zomato, and we have only captured key financial parameters of relevance to the Zomato IPO for the last 3 fiscal years.
Investment Perspective for Zomato IPO
That is the bottom line. Should you invest in the Zomato IPO or should you give it a pass. At the outset, this is not a company that you can measure on traditional parameters. This is a business that requires a lot of front-ending of costs and back-ending of revenue related benefits. Here are some parameters that would help you take a decision.
The food delivery business is largely based on the network effect. More options, means more customers and more customers means more gross order value (GOV). When there are more customers, more restaurants sign on and that is how the network effect forms a virtuous cycle. Zomato has surely perfected this virtuous cycle.
While this is an industry that is very dynamic, the network outreach, brand of Zomato and the size of the Indian digital market mean that there are no immediate top line threats for the company and that is the good news.
The unit economics of Zomato has been constantly improving as its promotion expenses have come down from 88% of total income in 2019 to 25% of total income in 2021. As a result, the contribution profit as a share of GOV has been positive in each of the four quarters of FY21.
These are the points you must keep in mind when you take a final call on investing in the Zomato IPO.