Zomato IPO – Expensive, But Welcome to Digital India

zomato Zomato IPO – Expensive, But Welcome to Digital India

Zomato IPO opens for subscription on 14 July and will be open till 16 July. During this period, it proposes to raise Rs.9,000 crore by way of fresh issue and an additional Rs.375 crore as an offer for sale to give partial exit to Info-Edge, which holds an 18.6% stake in Zomato. As per the DRHP filed with SEBI, the original issues size was Rs.7,500 crore as fresh issue and Rs.750 crore as offer for sale. However, there were two changes after that. The major shareholder, Info Edge decided to reduce its OFS portion from Rs.750 crore to Rs.375 crore. Secondly, due to the phenomenal response during the road shows, the company decided to increase the fresh offer size to Rs.9,000 crore. This will be one of the largest mop ups in recent times.


1 4 Zomato IPO – Expensive, But Welcome to Digital India

Key terms of the IPO issue of Zomato

  • The Rs.9,375 crore fresh issue will be used to bankroll the expansion plans of Zomato in the coming years. The fresh funds raised of Rs.9,000 crore will be allocated for the following purposes.
    For funding organic growth by expanding its scale and spread of operations to reach out to more customers across India.
  • For funding inorganic growth via acquisitions and takeovers of smaller and niche players to catalyse growth in the segment.
  • For financing general corporate purposes.
    %name Zomato IPO – Expensive, But Welcome to Digital India

Data Source: IPO Filings

Key B2B and B2C business models of Zomato.

The Zomato business model is a two-pronged model consisting of a B2B set of verticals as well as a B2C set of verticals. Here is a quick summary of business verticals of Zomato.

  • The major B2C offering is food delivery, where Zomato enables the selection and delivery of the food of choice to the client place seamlessly and digitally.
  • The other B2C segment is the Dining Out segment where Zomato facilitates the search and discovery of restaurants of choice through its customized app.
  • The major B2B segment of Zomato business model is the Hyperpure Vertical which supplies high quality ingredients and kitchen products to restaurant clients.

The last B2B segment of Zomato business is Zomato Pro, which is the customer loyalty program that is administered at a customer and partner level.

A quick look at financials of Zomato: What does it say?

Between FY18 and FY20, the revenues of Zomato picked up 5.5 times from Rs.500 crore to Rs.2,750 crore. The revenues were lower at Rs.2,118 crore in FY21, but the losses substantially narrowed to Rs.816 crore in FY21 compared to Rs.2,385 crore in FY20. The lockdown and the work from home or WFH trend helped to accentuate this trend towards online food delivery.

However, Zomato remains a loss making company both at an EBITDA level and also on the net income level, which is the norm for most of the ecommerce companies the world over. Since the company has been making losses, the better metrics to look at valuations would be the EV/EBITDA or EV / Sales
The global benchmark for Enterprise value to sales or EV / Sales. The global median EV/sales for the leading food delivery companies is around 18 whereas the latest funding round for Zomato happened at around 15 times EV / Sales. Even assuming a more premium valuation in the IPO, the metrics should still be comparable and perhaps as attractive as global counterparts, if not more attractive.

Forget valuations, there is an investment case for Zomato

As investors await finer details of the Zomato IPO, here are some hard facts behind the Zomato story.

  • Zomato was founded in 2008 as Foodiebay but the name was changed to Zomato in 2010 and has remained so since. Its international operations include Qatar, Sri Lanka, UAE, Philippines, South Africa, UK, US and Australia.
  • Zomato does not only delivery restaurant delicacies. It also delivers groceries and other home needs. In fact, Zomato is one of the major B2B suppliers of food and other ingredients to restaurants and other institutional customers.
  • Zomato has raised $2.1 billion till date from venture funds and the last round valued the company at $5.4 billion. The IPO is expected to value the stock of Zomato at closer to $7.95 billion.
  • Finally, a quick word on why Zomato could be profitable soon. They spent as little as Rs.55 on acquiring a customer and it breaks even once the first order is delivered. In a word, the potential is humongous.

    So, that in a nutshell are the fund facts and the hard truth about the issue

    The IPO valuation is apparently at a 45% premium to the last placement done. It is not too clear what is the justification for this valuation upgrade, although, like most digital IPOs, the bet is on a massive growth, lateral revenues and deeper customer ROI in the coming years. While the IPO is surely risky, it is a good method of riding the digital wave sweeping India.

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