What Zomato’s IPO Filing Reveals About Its Business

Zomato, one of India’s two largest food ordering and delivery companies, filed its draft prospectus with the market regulator to launch an initial public offering as it plans to raise growth capital for the post-Covid digital world.

It joins the likes of other food-tech giants like U.K.-based Deliveroo and U.S.-based Doordash, both of which have gone public in the last six months while the pandemic raged.

The Indian firm is looking to mop up close to Rs 8,250 crore ($1.1 billion), according to its draft red herring prospectus released on April 28. It’s also in discussions with investors for a Rs 1,500-crore ($200-million) pre-IPO placement.

The Gurugram-based firm, the first food-tech unicorn looking to public, will be launching an IPO as investor interest in consumer internet companies zoomed because of the pandemic.

Here’s what the filings say about its business:

Founded in 2008, Zomato has grown from being a food discovery platform to a food services platform with three businesses—food delivery; dining out, where it provides tools for restaurant owners to acquire customers; and hyperpure, where it provides ingredients and kitchen products to restaurant partners.

Key Numbers

• Delivery partners: 1,61,637.
• Active restaurant listings: 3,50,174.
• Active food delivery restaurants: 1,32,769.
• 1.4 million Zomato Pro members and 25,350 pro restaurant subscribers.
• Present in 526 cities in India and 24 countries outside India.
• The number of orders rose from 30.6 million (3.06 crore) in FY18 to 403.1 million (40.31 crore) in FY20.

The food consumption market stood at $670 billion (Rs 46 lakh crore) in 2019, most of which was driven by home-cooked food, Zomato said. Restaurant food (or food services) at present contributes only 10% to the food consumption market.

According to Redseer, India has a total addressable food services market opportunity of $65 billion (Rs 4.5 lakh crore) growing to $110 billion (Rs 7.7 lakh crore) in 2025, as millennials depend less on home-cooked food or kitchen set-up, with rising disposable incomes and spending, and higher acceptance in smaller cities.

Zomato said it’s going public as a professionally run company and not a promoter-led company. That’s a different approach from the likes of IndiaMART Intermesh Ltd., Just Dial Ltd. and Info Edge (India) Ltd.—all of which are promoter-driven. That’s also because no shareholder owns more than 25% stake in Zomato.

Deepinder Goyal, founder and chief executive officer, holds a 5.5% stake, while InfoEdge owns 18%, which will fall after the IPO.

Zomato’s decision to go public shows how far the food delivery market has come in India in the last six years. The number of players in the once-competitive industry has whittled down from five to two—Zomato and Swiggy. But it faces increased competition from cloud kitchen firms like Rebel Foods and quick service restaurants like McDonald’s and Domino’s.

The company, however, couldn’t have timed its IPO better.

A pandemic-induced lockdown in March 2020 disrupted business, with quarterly gross order volumes dropping to their lowest ever in the three months through June 2020. Ever since its food delivery business has recovered strongly. Gross order volumes in the quarter ended December 2020 rose to 2,981 crore, its highest ever.

Its average order value rose from Rs 265 in the three months through June 2019 to Rs 408 in the quarter ended December.

Not everything is upbeat, though.

The number of monthly active users on its platform stood rose from 13.8 million (1.3 crore) in FY18 to 41.5 million (4.15 crore) as of FY20, the prospectus showed. But in the nine months ended December 2020, it fell to 29.6 million (2.96 crore).

Monthly transacting users have grown from 0.9 million (9 lakh) in FY18 to 10.7 million (1 crore) two years later. In the nine months ended December 2020, that fell to 5.8 million (58 lakh).

Besides, the dining-out business is still recovering as customers remain wary of venturing out.

Making Money On Every Order, But...

In the last year, Zomato has earned 44% more on commission, despite charging customers 75% more for delivery. At the same time, with the surge in orders, delivery costs have gone down by 15% and it cut discounts by 66% per order.

From making a loss of Rs 30.5 per delivery in FY20, in the nine months ended December 2020, it has managed to earn Rs 22.9.

Yet, overall profitability may be far off for Zomato, causing concern among investors. Doordash’s stock tanked when it reported its first earnings after going public. Deliveroo’s stock fell by over a third within minutes of its debut in London.

Zomato expects costs to increase over time alongside losses as it will invest in growing its business, it said in the filings, adding the accelerated business growth stemming from the effects of the pandemic may not continue in the future.

Zomato has listed risk factors that may cause actual results to differ materially from those expected by the company. Apart from the usual competition, increased losses and expenses, inability to retain partners and changing regulatory landscape, it cited its foreign ownership as a risk.

Backed by Chinese billionaire Jack Ma’s Ant Group, Zomato said it will remain a foreign-owned and controlled company, and is subject to various requirements under the foreign direct investment policy and other foreign investment laws.

Determination by a regulatory or judicial authority, that any of its business activities are being, or have been, conducted in violation of the policies could attract regulatory sanctions, including monetary penalties. Zomato said it may not be able to undertake certain commercially attractive business activities or investments without prior government approval or at all.

India’s new social security code brought gig workers within its ambit. Zomato said while rules haven’t been notified yet, implementation of such laws could increase its employee and labour costs, impacting cash flows, business and financial performance.

Food delivery in India is a duopoly and could draw the attention of the competition watchdog. Zomato in December faced flak from the Competition Commission, which asked it to show cause on its acquisition of Uber Eats India assets wasn’t notified for review and approval.

While it has responded to the notice, there can be no assurance the CCI will accept its submissions or won’t pass any adverse order, Zomato said.