ZOMATO IPO 2021 | SHOULD YOU INVEST?

Hello there! Hope you are staying Safe and doing well! I have shared a detailed analysis of Zomato IPO (Video) on my Youtube channel which I recently started. This is sort of very first content video so please go watch it here : https://www.youtube.com/watch?v=Ymo_F1Xn0sg

All the latest updates on the Exact IPO Date, The Price Bands, Listing dates etc all will be updated as soon as we have an official update on the same from SEBI. Incase You don’t want to watch the above video and rather want to read along I am sharing the transcript below.

“Namaskar Friends, My name is Susmit Mukherjee You can also call me Aaditya. I am a SEBI Registered Research Analyst. And today we are going to talk about the much awaited Zomato IPO. Yes. Zomato is a service which is highly popular and many of us use it on a regular basis. Naturally the curiosity for the same is quite Hi. Now the question is should you invest in it? Let’s explore. Watch the video till the end and look at all the vital details.

Zomato is a leading food delivery and allied services company. In India there is a duopoly in this segment and one of those to companies is Zomato with an estimated market share fo 45-50%. The company has grown very very fast in the last few years and surely it has been a disruptive agent and a top player in its segment.

Where does Zomato’s Revenues come from? Obviously they earn from Food Delivery. They earn commissions from restrains and charge delivery fees from customers both of which are inbuilt. Also, they are a leading restraint listing and reviewing portal in India. Currently there are 3.5 lac restraints listed in the Zomato Portal. Apart from these two there is Zomato Pro and Zomato Hyper Pure. Zomato Pro is a Premium service which help customers get dining booking in restaurants and flat discounts. There are estimated 14 lakh subscribers in this vertical. Lastly Zomato Hyperpure procures raw materials restraunts and has been significant revenue generator for Zomato also.

Now let us talk about the management. Zomato is Promoted by Info Edge – a company which has been a top ranking and pioneering force in online listing and search industry for decades now. It has given businesses such as Naukri.com, the top recruitment search portal in India, 99acres, a leading real estate search and listing portal, jeevansathi.com a favorite matrimonial  website of India. Zomato is also Backed by AntFin whose promoter is Jack ma, the Alibaba man.

Let’s talk about the numbers now. If we look at the revenue growth then  from financial year 2018 till financial year 2020 the company has grown more than 5 times – that is from 487 crores to 2742 crores. This is a disruptive pace for sure!

The loan burden on the company is also very low. The company financial costs are decreasing day by day. In the last reported segment the company’s loan is only 4% of the revenues.

Some figures are there which go against Zomato. We also discuss about that. IN Fy21 Zomato revnue has shrunk considerably particularly due to the closures and slow opening of the restraunts during the lockdown period. But the revenues have again bounced back and are again back to hitting  historic peaks from December 2020.

Zomato does not make profits. Infact its losses if compared with the revenue are very high in numbers. This is the result of high expenses and negative pricing competition between the peers. Zomato is finding it difficult to reach break even at the present point of time. The strategy of the major players in this segment is to focus on volumes, earn loyalty of the customers, change their habit patterns and in due course reach break even through better pricing and maximizing efficiency.

What are the reasons for these loses? The first major reason for such high losses has to be Zomato’s expenses. There are four main types of expenses which Zomato has to keep up. The first is its own employee team which is mainly running the show. The second is there ads and promotions which are essential for brand expansion and recall. The third is their IT infrastructure which the bedrock of the their customer experience. And the fourth is the entire delivery network. Zomato had almost 2 lakh delivery personnel and their per day per head cost can be somewhere around 400 Rs.  And as their order volume reaches its peak this cost is bound to rise as a single delivery person can deliver maximum 8 to 10 orders per day on an average. These expenses are more or less indispensible as the company cannot afford to compromise on them or else the business could suffer.

In this chart I have shown the break-up of these expenses that the we just discussed. As you can see these expenses together have surpassed the revenues many time and these are not the total expenses. If you take the total expenses into account the scenario becomes somewhat like this. It will be a very big achievement for Zomanto if they are able to reach break even in the near term.

What is the future outlook then? Revenue growth will be very good in the mid term. Even though the interim lock down can create hurdles but the general trend of growth will be great. The company is part of a duopoly and has a great brand pull and will likely have so in the future also. Zomato is kind of an  end to end value chain service where not only it delivers cooked food to the customer it actually procures raw materials for restraunts, helps them get dine out bookings and  helps them in listing too. This whole value chain is covered by Zomato. But on the other hand, we may see negative revenues in the future also. In-fact the proceeds from this IPO which is estimated around 8250 crore is going to help Zomato easily offset the atleast next three years of cash burn before which they will hopefully become cost efficient and profitable too. The company has around 63 thousand crore  of equity while its valuation may come somewhere around 50000 crore estimated which is high. But one has consider the scope and potential of the business which is high growth and disruptive.

Lastly we talk about the competition. AS we may know Zomato has a neck to neck competition with its peer Swiggy which is the other half of this duopoly. Together they are catering to 90% of the market and have almost similar shares. Both are growing at break neck speed and both are getting great valuations in the investment fraternity. But both have not seen the face of profits yet. They are competing for market supremacy. Apart from Swiggy there are two other competitions – Food Panda and Amazon Food. Amazon Food is now delivering across 62 pin codes in Bangalore and no points for guessing that its plans are to scale up.  Food panda is also growing fast and delivering food across multiple cities. If you consider this segment play as a race then these three companies that Swiggy, Amazon Food and Food Panda are rear view competitions for Zomato, that is Zomato has to remain ahead of them. On the other hand if Zomato wants to expand its domain, lets say, tomorrow Zomato wants to become a major player in groceries, then it will find Big Basket, Jio Mart, Amazon Pantry and even Dunzo in front of it. Jio Mart is very fast taking over the top position ahead of Big Basket, Amazon Pantry has already expanded to 64 cities, and Dunzo is also growing fast as a multipurpose delivery partner but its scale is still not the same as someone like a Zomato or Swiggy.

This entire Segment is rooted in one major factor– who can endure the maximum cash burn and for the maximum period. And in such a scenario the kind of Promoter Backing they get becomes very important. Scale is also equally important as higher scale maximizes cost efficiency. Zomato may receive 8250 crore from this IPO which will give it an edge in terms of withstanding cash burn atleast for the next three years which is a very important advantage. We have to focus only on two factors here – one is whether the company’s losses are coming down or profits are being made, and second whether the promoter are hanging on to it without excessively diluting their stakes. If these two factors go well the company will do well in terms of market value growth too. I would say cautiously invest. If you want to expose more than what you believe is a small amount then analyze before doing so. This IPO definitely can be a very popular play in the markets and give short term gains too. But I the macro sentiments reverse in the near term that will harm the market value.

All the Numbers are not that good yet but the Promoters have again and again proven their excellence and pioneered their segments, the above numbers are a testimony for the same. They have continually drained cash but the business is so highly valued they have never had to take excessive debt. This is among the very select businesses that can endure such cash drain. They are the leader in most of the segment that they have touched. This is a really significant point of comfort. Thank you so much for watching this analysis.”