Are you a first-time investor who just heard about the Zomato IPO listing? This article is for you.
When is Zomato IPO coming into play? From 14th July to 16th July 2021. When and how to apply for the Zomato IPO? You can start applying right now with the Groww app. The shares are priced between Rs. 72-76. Since the Zomato IPO release date is 14th July, you can only put in your requests now with Groww. The requests will be validated only after the 14th.
But the real question is- Should you invest in the Zomato IPO?
Investing in stocks is always a risky business. Investing in IPO or Initial Public Offering is even more so. Why? Because this is when a private company is opening up its stocks to the public for the first time. What makes the Zomato IPO listing even riskier?
Zomato is one of the first and biggest digital businesses in India that is “going public” for the first time. Other digital businesses like PayTM are supposed to follow but it still hasn’t happened yet. There is no precedence. So, is investing in Zomato IPO a risk worth taking?
You need to keep many different risk factors in mind before you think of investing your hard-earned money. But before I get to those, you should know about the fundamentals of Zomato itself. This is always the first step of research that you need to undertake before making an investment in IPO.
Everything You Must Know About Zomato Before Investing in Zomato IPO:
Who Founded Zomato and When?
Zomato was founded by two IIT-Delhi alumni, Deepinder Goyal and Pankaj Chaddah. They had initially come up with the idea of a simple digital menu directory. The company came into being as Foodiebay in 2008 with its headquarters in Gurgaon, Haryana. The name Foodiebay was later changed to Zomato in 2010, to avoid any associations with eBay.
Chaddah exited the company in 2018. Allegedly he left because of the top brass of the company being shuffled around. Mukund Kulashekaran has become the chief business officer. Deepak Gulati, chief operating officer, also left Zomato suddenly during this period.
Core Idea Behind the Operation of Zomato
Zomato began as a menu directory; an online platform where menus of different restaurants could be uploaded. Slowly, they branched on to becoming a restaurant review platform and much later a food delivery platform.
Zomato made it easier to order food because hundreds of local restaurants were visible on the same list. Restaurants, in turn, got publicity and reviews. The food delivery system became a lot less haphazard with Zomato. People knew whom to hold accountable for flawed orders or deliveries.
Since Goyal and Chaddah came up with this idea in 2008, they had the first-mover advantage. This was a time when none of the major food industry startups had come into play. Swiggy, Faaso’s, Foodpanda, etc. would only be born after the 2010s.
How Did Zomato Receive Its Funding?
Due to its first-mover advantage and fresh idea, Zomato managed to get funding pretty quickly.
Sanjeev Bhikhchandani of Naukri.com was the first to notice Zomato’s potential. He invested $1 million through Info Edge India in 2010. It invested $13.5 million more in the later years. Info Edge remained one of Zomato’s biggest shareholders throughout its journey. Currently, Info Edge owns 18.5% of the shares. It is also planning to sell a portion of its shares in the IPO.
Zomato also received funding from investors like Sequoia Capital, VY Capital, and Temasek.
Since Zomato had no lack of funding, it managed to spread its franchise across several foreign countries by 2013. Presently, Zomato operates in 24 different countries.
As of 2021, Zomato has acquired 12 startups globally.
I’m going to go into the nitty-gritty details of Zomato’s finances in a bit.
What is Zomato’s Revenue Model?
Unlike most food startups, Zomato makes money in a lot of different ways:
- Restaurant Listing and Advertisements
Restaurants need to pay a nominal fee for being listed on Zomato. However, all restaurant owners know that getting a listing is not synonymous with getting noticed.
This is why restaurants also pay Zomato for their banner advertisements to become more visible. If they have a special offer going on, they can also pay Zomato to highlight it in their ads.
- Commissions on Deliveries
Zomato and the delivery partner share the commission that is charged on the deliveries. The more orders a restaurant gets, the more commission Zomato makes. It’s a win-win scenario for both.
- Zomato Gold Memberships
Though Zomato itself is free, Zomato introduced a paid membership program called Zomato Gold in 2017. Through this, users can avail a variety of amazing discounts.
The users are not the only ones who pay to avail of this membership. Restaurants also pay a monthly fee to get listed on Zomato’s bouquet of offers. Zomato makes a sizeable income through its subscription program. Zomato Gold has recently been rebranded as Zomato Pro.
- Zomaland Live Events
Zomato started organizing branded live events called Zomaland since 2018. These events not only featured food festivals but also live music concerts. These events are organized across all the major cities of India. Zomato claims that these events have a footfall of more than 100k.
Going by that number, it is safe to say Zomato makes quite an income out of the ticket sales.
Zomato also makes a handsome income by selling tickets for events that are hosted in its listed restaurants.
- SEO Consultation
This is a branch of income that might not have occurred to you immediately. Zomato offers SEO consultation and analytics tools to the restaurants in exchange for a fee. Restaurants pay this charge to get increased conversions and visibility. Zomato also provides consultation for cloud kitchens.
- Zomato Hyperpure
You possibly won’t know about this unless you actually run a restaurant listed under Zomato. Zomato Hyperpure allows restaurant owners to order all of their kitchen supplies and groceries over a single platform. Why opt for Hyperpure? Because the inventory and the cost of running the kitchen are meticulously maintained. The restaurant has to pay Zomato to avail of this service.
Zomato’s Finances: What Was Zomato’s Growth in the Past Five Years?
The finances of private companies are not usually transparently available to the public view. But companies cannot get an IPO listing unless it makes its finances public.
Zerodha supplies the following chart of Zomato’s finances since 2018.
Zomato is running at a loss now and has run at losses before. I’ll tell you why.
First, take a look at Zomato’s DHRP filing. This will give you a detailed picture of the company’s operations and financials.
Zomato only entered the food delivery business in 2015. It spent a long amount of time expanding its services to several other countries. Swiggy, on the other hand, came into the scene much later in 2014. But it always focused on establishing its foothold in the domestic market.
2015-2017 were not great years for Zomato. They consistently lost funding and had to lay off their employees. They were also forced to pull back from 9 different countries. These were also the years when Zomato suffered a hacking attack.
Has Zomato fared well during the pandemic? The answer is complicated. It has definitely fared better than the others, but not objectively better. This graph will show you how its upward growth curve has dropped during the pandemic.
But as you can see, Zomato is still performing better than the rest of the food industry.
So, why am I saying that Zomato is running at a loss?
Because it is. Despite earning Rs. 22.9 per order, Zomato suffered monthly losses of rupees 74 crores per month between April to December 2020.
You would think that the pandemic would convince more people to order in, but that was not the case. The number of users dropped from 10.7 million to 5.8 million during the lockdown. Justifiably people were scared of the lack of proper sanitization.
This was the status of Zomato’s losses according to the DHRP filing:
However, Zomato has adopted several pandemic-specific revenue development measures. Its $120 million investment in Grofers was a move in that direction. Though the food delivery business is suffering, the e-grocery market has seen a boom during the pandemic. Zomato’s decision to acquire Grofers came zoon after Tata Digital’s decision to acquire BigBasket. Faced with the losses of its dine-out facilities, this is the only profitable choice left for Zomato.
Despite these losses, Edelweiss has fixed Zomato’s IPO valuation at approximately Rs. 60, 000 crores. Why and how?
What is IPO valuation and How is it fixed?
IPO valuation is the process through which the fair value of the company’s shares is determined. To make it more simple- IPO valuation tells you how much a company’s share should be worth. An independent investment bank decides the IPO valuation of a company.
IPO valuation depends on several factors:
- Demand
- Valuations of Competitors.
- Growth Prospects
- A Compelling Corporate Narrative
Looking at these factors should make it clear why Zomato has such a high valuation despite running at a loss.
The Demand is at an all-time high. And Zomato knows it. No company decides to go public unless it is sure that the public will buy its shares.
Why is the demand for Zomato’s shares high?
The answer is simple. With the restaurants closing down during the lockdown, food delivery services like Zomato have been the only ray of light. Not just for the youth, but also for the older generation.
But demand isn’t just objective. I’ll tell you why.
In The Intelligent Investor, Benjamin Graham provided the following grim account:
In America’s first great IPO boom back in 1825, a man was said to have been squeezed to death in the stampede of speculators trying to buy shares in the new Bank of Southwark. The wealthiest buyers hired thugs to punch their way to the front of the line. Sure enough, by 1829, stocks had lost roughly 25% of their value.
Zomato is using its first-mover advantage with its IPO listing as well. During the technology boom of the 2000s, the companies which went public first had immense IPO valuations. Compared to these, similar companies that went public later had lower valuations. What led to this difference? The craze is always bigger when the concept is new.
As for Valuations of Competitors, Swiggy is a formidable threat to Zomato. Currently, there is almost no sizeable difference between the two companies. However, since Swiggy has no plans to get an IPO listing anytime soon, Zomato is spared competition in this regard.
Growth Prospect is a criterion in which Zomato wins. It’s half the reason for its 60k crore valuation. According to the prediction of experts, Zomato is supposed to report $1.4 billion in revenue (from commissions of deliveries) in FY23. This figure is 5x times more than its revenue now. So, justifiably it’s quite enticing for investors.
Moreover, it is expected to turn profitable at an EBITDA and FCF level by FY23 as well. EBITDA means “earnings before interest, taxes, depreciation, and amortization.” And FCF refers to the “free cash flow” after the operational and capital expenditures. Goldman Sachs also claims that Zomato will reach EBITDA breakeven by this time as well. EBITDA breakeven happens when the company’s expenses become equal to its revenue within a specific accounting period.
As for a Compelling Corporate Narrative, Zomato has been nailing this from the very beginning. This is not an objective or measurable criterion by any means. It’s the narrative that you create around yourself.
During the 1990s, most of the companies that pioneered the Internet had nothing but an exciting narrative. All they had going on for them was a futuristic story about how they would transform the world. Another glaring example of this is the cryptocurrency industry right now. The prices of cryptocurrencies fluctuate with Elon Musk’s words alone.
You can take a look at Zomato’s Corporate Narrative for 2020 right here.
So, now that you know everything else about Zomato IPO, I’ll come to the crux of the matter.
What Are The Risk Factors Of Investing In Zomato IPO?
As a first-time investor you must be wondering- should I invest in heavyweight stocks or an IPO? Which one is guaranteed to be more profitable?
There’s no set answer to this. First, you shouldn’t invest all your money in one particular kind of share at all. Be it heavyweight stocks or IPO. And you have to be prepared to suffer a 20-30% loss. Moreover, seasonal fluctuations should not bother you. You are looking for long-term gain.
But there’s a certain guarantee of reduced fluctuation that you see with heavyweight stocks. These companies have been in existence for 20-30 years and their finances have been available to the public for all this while.
The same is not true for private companies like Zomato. SEBI is forcing Zomato to be open with its finances now for the sake of their IPO listing. But you still cannot get a very accurate history of their finances. As I’ve mentioned before, a lot of a company’s success story depends on the narrative that they build around themselves. Actual statistics and figures are often overshadowed in the buzz.
The high demand for shares works brilliantly for the company. Do they work brilliantly for you? Not really. Zomato is not selling its shares at a loss here. They are selling to make a profit. Planning to raise Rs. 9375 crores is no joking matter. Investors are expected to invest based on the company’s stupendous growth prospects.
Which leads us to the very obvious question- Why is the company selling its shares at all? Especially when it stands to gain such immense profit by 2023.
This niggling suspicion is not uncommon. Insiders who know much more about the company are selling the shares to outsiders. This leads everyone to the same conclusions:
- The shares are probably overpriced
- The insiders stand to make a gain
- The profits for investors are largely hyped-up.
- They are losing big, corporate investors.
Added to this, there is the question of the pandemic. The market is at an all-time low. And you cannot really predict if it will go up. COVID-19 and its variants cannot be predicted after all. So, is this really the time to make such a risky investment? Growth prospects are great. But that’s all that they are. Prospects, dreams of the future. Not concrete proof of success.
So, should you invest in Zomato IPO?
The answer, at the end of the day, lies with you. Don’t buy into the buzz just because there is a buzz. Delve into the real financial figures of the Zomato DHRP report.
There’s one good news I can leave you with though.
Info Edge has reduced the offer for sale size to half. That is, from 750 crores to 375 crores. This has reduced the initial offering size of Zomato IPO as well. What this basically means is that they want to retain the shares. This also means that one of the major shareholders of Zomato genuinely believes in the growth prospects.
You have to make up your own mind about the issue. Hopefully, I gave you enough reasons to not rush into investing in Zomato IPO just because of the hype.
Are you planning to invest? Do let us know in the comments below!
