ZOMATO’S IPO – DO UNICORN’S RISE OR FALL?
While the pandemic hit all industries, the digital ones were able to push back faster and cut down costs to aid their speedy recovery. In the last few years, India has seen a flourishing startup environment with many unicorn startups (valuations being over $1bn). 13 startups made their entry into the unicorn club in 2021 but those who are old members seem ready to make it big in the IPO market. As Flipkart, PolicyBazaar, Freshworks, Nykaa and Delhivery aim to go public in the coming years, let us see what is in store for Zomato - the first Indian unicorn to go public.
Though not in India, loss making startups have listed in countries worldwide. These include Uber Technologies (ride hailing, food delivery and other technology services), Snap (camera and social media), Lyft (ride sharing application), DoorDash (online food ordering), Airbnb (lodging technology services) and Snowflake (cloud computing-based data warehousing) – which got listed in the last few years with each one providing unique, upcoming, technology enabled services.
Last year in 2020, when DoorDash’s IPO hit in the USA market, it listed at a premium of 86% to its IPO price at $189.51 but today stands at $143.17. The investors then said that its margins were a temporary pandemic effect which would drop eventually, the company was making losses and would continue to do so for long years, had not real differentiation to competitors and innovation to the service and that investors would lose money. Though investors made listing gain therein, the long-term success seems dubious.
In India, most traditional valuation and IPO evaluation is done based on the last 4-5 years profitability. A new approach of investing and looking deep down into the future becomes necessary then for valuing the companies in the internet space backed by venture capitals. IPOs of loss-making companies like Burger King and Nazara Technologies received some COVID revival tailwinds to drive their listing prices, but as more and more loss-making companies come to the market, sentiments and outlook of investors will play a vital role. SEBI allows loss making companies to go public only when, as per the second filter conditions, the issuer allots a minimum of 75% of the net offer to QIBs (Mutual Funds, AIFs, etc). This is what Zomato will also be doing, thus, leaving lesser on the table (only about 10% of the issue) for retail investors and landing up creating supply scarcity.
Zomato hails from a similar company background like DoorDash with added on services and a different geographical market – one of foodies who are united by their love for food but divided in their socio-economic class. Zomata was founded in 2008 as Foodiebay – with the only functionality of being a food directory – by Deepinder Goyal and Pankaj Chaddah. Eventually they added the feature reviewing restaurant outlets on their platform too. The platform did not start with food delivery as late as 2015 after Swiggy (its major competitor today) came into the market. When Uber Eats started eating into its market share, it raised funds and acquired the Uber Eats India business and data and today stands with almost 50% market share thereby. Now, Zomato is coming up with a Rs. 8250Cr IPO of which Rs. 7500 is the issue of new shares and Rs. 750Cr is an offer for sale by Info Edge. The funds it will acquire from the IPO will also be used towards organic and inorganic growth as the company aims to drive out competition and increase their domain expertise, bring new customers and technology. Though at least 40% of the funds they raise are for organic growth through marketing, they also plan to roll out nutraceutical products and grow in that direction.
During FY2020, Zomato served 41.5 million monthly active users across 526 cities and with 350,174 active restaurant listings. Though having a presence in 23 more countries, they are clear to have India as their focus market. The core business idea is that people in India are going out to eat at restaurants more than they cook at home for which they offer 4 services – Food Delivery, Dining Out, Hyperpure (raw material procurement and delivery to restaurant partners) and Zomato Pro (customer loyalty program).
The factors that have had and will continue to have a significant effect on Zomato’s financial condition and results of operations are:
Customer base and restaurant listings – number and growth in customers and restaurant partners and the restaurants pricing and operating costs – both having decreased in the 9MFY21 period
Number of orders, Average order value and Commissions - number of orders depends on customers and restaurants and reputation, AOV on the restaurant pricing and number of people the food is being ordered for and commissions are fixed at about 20% on average for restaurants – the AOV has risen each quarter to being Rs. 407.8 recently and the GOV being Rs. 112,209Mn for FY20.
Cost effectiveness – which is function of advertising, delivery, and technology costs - As a percentage of total income the advertisement and sales promotion expenses increased from 16.66% in Fiscal 2018 to 48.80% in Fiscal 2020, and then reduced to 22.44% in the nine months ended December 31, 2020.
In terms of its loss-making journey, the company has a loss of 49.88% of its revenue which is Rs. 6821.99Mn and an employee benefit expenses of 40.15% of revenue which is Rs. 5490.82Mn (a contradiction to the lay-off history the company holds). The company also has huge, outsourced support costs of about Rs. 3633.45Mn and an astonishing liquid investment of Rs. 46610Mn (more than half of the IPO issue size – which could have been a cheaper working capital source). The company does not have many loans and has been constantly raising capital for venture capital and private equity funds.
The journey of fuelling Zomato with investments was the only way to survival. Info Edge was the first investor of Zomato and from its first investment of Rs. 6Mn in 2010 at a per-share basis of Rs. 1.16, it continued to invest in Zomato up until 2015, once in time holding more than 50% stake in the company. Other than that, till date Zomato has raised funds through 23 investment agreements with various investors like AliPay Singapore Holdings Pte Ltd, Antfin Singapore Holding Pte Ltd, Sequoia Capital India and Tiger Global, among others. The latest round was held in February for $250Mn wherein the firms’ value was Rs. 58.2 per share. Info Edge being the only investor to sell their stake in the recent IPO may be a show of confidence in what lies ahead.
The company’s primary business shows cost adaptability and huge potential in the duopoly food tech market as the internet penetration and work from home culture evolves. The sustainability looks like a long shot but then that is primarily what a unicorn loss making start-ups investor needs to tick in his list of risks he is willing to take. Though projections and valuations hint at profitability for the company in the next 1-2 years itself, but the trend worldwide shows that unicorn start-ups on average cannot sustain the long run in the secondary markets with investors losing hopes quick and hoping from one stock to another. Let us see what turn Zomato takes at the IPO game!