Zomato's US$1 bn IPO Has Arrived. Here's What You Need to Know

The much-awaited initial public offering (IPO) of online food delivery and restaurant discovery platform Zomato will open for subscription on 14 July 2021.

The offer size will likely be as much as Rs 93.75 bn, making it the second-biggest IPO in the last four years after the Rs 103.6 bn offer from SBI Cards and Payment Services.

The offer will comprise fresh equity of Rs 90 bn and an offer for sale (OFS) worth Rs 3.75 bn from Info Edge, one of the company's largest shareholders.

Info Edge has reduced the size of the OFS in the Zomato IPO from Rs 7.5 bn targeted earlier by about half. Info Edge currently owns around 18.5% of the company.

Here are some quick details about this offer...

Issue period: 14 July 2021 - 16 July 2021

IPO Size: Rs 93.75 bn

Price band: Rs 72 to 76 per share

Bid lot: Minimum lot of 195 shares, and in multiples of 195 thereafter

Retail Category: Not more than 10% of the net offer

Kotak Mahindra Capital, Morgan Stanley India, and Credit Suisse Securities (India) are the global coordinators and book running lead managers (BRLMs).

Bank of America (BofA) Securities and Citigroup Global Markets India will manage the issue. Link Intime India is the registrar of the issue.

Object of the issue:

The company plans to use the proceeds from the IPO for funding organic and inorganic growth initiatives and general corporate purposes.

It will continue to invest in three core areas of growth which include customer and user acquisition, delivery infrastructure, and technology infrastructure.

About Zomato

Zomato is a technology platform that connects customers, restaurant partners and delivery partners, serving their multiple needs.

Customers use the platform to search and discover restaurants, read and write customer-generated reviews, order food delivery, book a table, and make payments while dining out at restaurants.

On the other hand, the platform provides restaurant partners with industry-specific marketing tools which enable them to engage and acquire customers to grow their business while also providing a reliable and efficient last-mile delivery service.

It also operates a one-stop procurement solution, Hyperpure, which supplies high-quality ingredients and kitchen products to restaurant partners.

Arguments in favour of the business....

• The company has a strong brand name and recall across large and small Indian cities. The brand is synonymous with food and customers associate it with everything to do with it.
• The company leverages artificial intelligence, machine learning, and deep data science to continuously drive innovations. Its products are highly personalised, intuitive, and designed to drive high engagement with customers. It also enables restaurant partners with fully automated order management systems.
• The company operates one of India's largest hyperlocal delivery networks, based on the number of delivery partners as of 31 December 2020. According to RedSeer, the company had 161,637 active delivery partners in the month of December 2020.
  
  While the business has grown rapidly since 2018, the unit economics of the company's food delivery business has also improved consistently. The unit economics for the food delivery business for the financial year 2020 and nine months ended December 2020 are illustrated below:

What are the risk factors?

• Zomato faces intense competition in food delivery and other businesses. According to RedSeer, Zomato competes with other food delivery companies, chain restaurants that have their own online ordering platforms, cloud kitchens, other restaurants that own and operate their delivery fleets and companies that provide a point of sale solutions and restaurant delivery service.
• The company has a history of net losses and anticipates increased expenses in the future towards growing the business. It expects to spend substantial resources on advertising and sales promotion costs to attract customers, develop its platform, and expand into new markets etc. These efforts may not result in profits.
• Unfavourable media coverage could harm the business and financial condition of the company. In 2019, Zomato received negative media coverage related to its subscription product as some of its restaurant partners did not view the discount terms offered to customers favourably. Zomato also faced negative publicity with respect to its delivery partners due to alleged instances of assault, food tampering, and payouts.

Market opportunity for Zomato

According to RedSeer, Zomato has a total addressable food services market opportunity of US$65 bn (Rs 4.6 tn). This is expected to grow at 9% per annum to US$110 bn (Rs 7.7 tn) in 2025.

While food services in India is highly under-penetrated, it's likely to grow steadily, taking share away from homecooked food as has been the trend in the past as well.

Growth will be driven by changing consumer behaviour, increasing consumer disposable income and spending, and higher adoption among the smaller cities.

Food Services is a competitive market in India comprising food delivery players such as Zomato and Swiggy, cloud kitchens and branded food services players.

In this competitive market, Zomato has consistently gained market share over the last four years to become the category leader in the food delivery space in India in terms of GOV from 1 October 2020 to 31 March 2021.

The chart below represents the year on year growth of Zomato and the industry:

Financial snapshot of the company

Zomato has reported a loss for the last few years. Zomato's losses widened from Rs 1.1 bn in 2018 to Rs 23.9 bn in 2020. The company is burning cash to get a strong foothold in the market.

While the loss is primarily on account of high expenses, this has resulted in negative cash reserves for the company, rendering a poor ROCE.

However, the company's sales have grown consistently. Zomato reported a 465% jump in total revenue from Rs 4.6 bn in 2018 to Rs 26 bn in 2020.

Its orders have also grown from 30.6 m in 2018 to 403.1 m in 2020.

Zomato Financials (2016-2020)

For more details on the company's financials, check out Zomato's Red Herring Prospectus.

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