IPO Analysis: Zomato Ltd

The price band of the issue has been fixed at Rs 72 to Rs 76 per equity share. The IPO opening date is July 14, 2021, while it will be closing on July 16, 2021. The issue will be listed on the exchange on July 27, 2021.

IPO rating- Invest for listing gains   

 About the issue:   

Zomato Limited is one of the leading online food service platforms in terms of the value of food sold as of December 31, 2020. The company is coming out with its initial public offering (IPO) of equity shares of the face value of Re 1 per equity share. The maiden offer comprises a fresh issue of Rs 9,000 crore and the sale of shares worth Rs 375 crore by existing investors, according to its red herring prospectus.

The price band of the issue has been fixed at Rs 72 to Rs 76 per equity share. The IPO opening date is July 14, 2021, while it will be closing on July 16, 2021. The issue will be listed on the exchange on July 27, 2021. The IPO market lot size is 195 shares. A retail-individual investor can apply up to a maximum of 13 lots (2,535 shares or Rs 1,92,660). The net proceeds generated from the IPO will be utilised towards funding organic and inorganic growth initiatives as well as for meeting general corporate purposes.     

Zomato IPO details   

About the company:   

Incorporated in the year 2010, Zomato offers a technology platform that connects customers, restaurant partners, and delivery partners to serve their multiple needs. Its B2C business model allows customers to use this platform in order to search & discover restaurants, read & write customer-generated reviews as well as view & upload photos, order food delivery, book a table and make payments while dining out at restaurants. On the other hand, it provides restaurant partners with industry-specific marketing tools, which enable them to engage and acquire customers to grow their business along with providing a reliable & efficient last-mile delivery service.    

Zomato also operates a one-stop procurement solution with the name- Hyperpure, which supplies high-quality ingredients and kitchen products to restaurant partners. It also has a customer loyalty programme called Zomato Pro, which is a paid programme that allows customers to gain extra discounts, offers, and other privileges.   

As of December 31, 2020, Zomato has established a strong footprint across 23 countries with 1,31,233 active food delivery restaurants, 1,61,637 active delivery partners, and an average monthly food order of 10.7 million customers. The company was present in 526 cities in India with more than 3,50,000 active restaurant listings. The mobile application of Zomato is the most downloaded food & drinks application in India since 2018 on the iOS App Store and Google Play combined.   

Key stakeholders: 

The company has three key stakeholders in its food delivery business: 

Customers: They are the ones who place requests for food delivery on their ‘Zomato’ mobile apps. An increase in customers is directly linked to the increase in sales and is the most vital stakeholder. 

Delivery partners: With more than 1,60,000 active delivery partners, the company operates across 23 countries. They were called the 'Superheroes' as they risked themselves in order to provide timely and satisfying food delivery. 

Restaurant partners: With more than 3,50,000 actively-listed restaurants in India on its portal, a customer has a wide range of options to choose from, which makes restaurant partners, an important stakeholder of the company. 

Competitive strengths:  

Among the leading foodservice delivery platforms.  

Strong network effects are driven by our unique content and transaction flywheels.

Recognised consumer brand equity across India.  

Widespread and efficient on-demand hyperlocal delivery network.  

A strong network of 1,31,233 restaurants and 1,61,637 delivery partners.  

It has a technology and product-first approach to business.

  Financials:  

The pandemic did impact Zomato's business as the nation remained locked down in the first couple of months of FY21 before the economy reopened gradually. Revenue from operations dropped 23.4 per cent to Rs 1,994 crore in the year ended March 2021. Loss, however, narrowed to Rs 812 crore from Rs 2,363 crore, the year before as the company cut discounts and costs per order. The business was impacted drastically during the first lockdown but it came strong in Q2FY21, registering a growth of 91.6 per cent. In Q4FY21, the gross orders hit a metric record of Rs 3,313 crore.   

Zomato’s average order value has come down to Rs 394 in Q4FY21 from Rs 407.8 in Q3FY21. The number of monthly active users also fell by 23 per cent to 3.2 crore in FY21 from 4.1 crore, a year earlier.  

From making a loss of Rs 30.5 per delivery in FY20, it earned Rs 20.5 in FY21 by charging 75 per cent more on delivery and earning 44 per cent more commission in FY21. It also slashed the discounts by 62 per cent per order, which helped them to reduce their loss significantly despite lower revenue in FY21.  

Recommendation:  

Gurugram-headquartered company is looking to raise as much as Rs 9,375 crore, which will be used for organic and inorganic growth initiatives as well as for general corporate purposes. The major revenue, which comprises over 75 per cent comes from the food delivery segment while only 8-9 per cent comes from food consumption in India. Zomato is also looking at online grocery from an experimental point of view, which is why the $100 million investment in the online grocery company, Grofers has been made. This would be India’s first IPO offering by a consumer internet platform. The company is still running into losses while it seeks a rich valuation in the IPO. The company, early in FY2021, was severely affected by the pandemic with revenues drying up completely due to national lockdown. However, the recent fourth quarter was best for the company wherein, it recorded the highest-ever gross orders. The vaccination drives have improved while an uptick in the vaccines has paved the way for a partial reopening of the economy. As this will progress further, the country would be looking for a complete unlocking, which will further help Zomato's restaurant business. Many hotels & restaurants have faced the heat of the pandemic, which has let to partial or complete closure of their business. This has resulted in the lower business of the company, which is expected to improve further. The pandemic has also kept away many people ordering from outside due to hygiene care. The company with its extensive network and recognised brand image is well-placed to take advantage of the growing demand for online food delivery and restaurant business. Looking at the above positives, we believe that the company will keep growing its business, and hence, you can invest for a listing gain.