“Zomato IPO-Should you put money into Zomato IPO or not?”

Zomato– whenever we hear the name, we remember foods. Issue Period for the will be from 14th July to 16th July 2021. The company will charge around 72-76 per equity share. The minimum required amount is 14,820 Rs to invest in Zomato IPO.

What is IPO or Initial Public Offering?

By IPO an organization lists its shares in the stock market. Where institutional or retail investors can buy or sell those shares from the stock market. There are two types of IPO’s-Fixed Price Offering & Book Building Offering. In this article, we will not discuss this, instead, we will focus on Zomato IPO.

We will explain a few major points like business model, revenue model, earnings, Covid impact, strength, and weaknesses, to help you with the decision of investing in Zomato IPO.

History

The creation of Zomato started actually started in 2008 as a restaurants discovery website (foodiebay.com). Later in 2015, it has started the food delivery business. During that time Zomato was not alone in the market. But Zomato had several competitions at that time, for example, Swiggy, tiny owl, Olacafe, Food panda, Runnr, etc. Today mainly two companies are battling to win the food delivery market in India Swiggy & Zomato.

Zomato Revenue Model

As we said before Zomato initially started as a food discovery website. It used to tell us dishes, menu, locations, etc. It is the largest food-focused restaurant listing, reviews, and online table reservation platform in India. In this process, it makes money from those restaurants that pay them to increase their visibility. As of 31st Dec 2020, it had 3.5 lakh active restaurants listing on its platform.

Zomato has a paid membership program (Zomato Pro), which provides flat discounts on selected restaurants & dine-outs. As of 31st Dec 2020 it had 1.4 million such members. They make money from this service as well.

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It is worth mentioning Zomato has a subsidiary company named Hyperpure. Hyperpure provides raw materials to the restaurants. This business started in 2019 & as of late 2020, it has supplied raw materials such as grains, fruits, vegetables, etc to almost 6000 restaurants in six different cities.

Lastly & mainly, it makes money through the food delivery model. Of course, right? We’ve ordered food from the app so many times. Maybe some of you are still having your food in one hand from Zomato while reading this.

It acts as an agent between restaurants and customers. They take a commission from the restaurants and delivery fees from the customers. You should know that along with India Zomato also operates the same in 23 other foreign countries, UAE, Australia, New Zealand, Slovakia, U.S.A., Philippines, Malaysia, etc. Although as of 2020 company almost generates 90% of its revenue from India.

Impact of Covid-19 on Zomato

In the first quarter of 2021, there was a significant impact on its business. Zomato hit its lowest GOV (Gross Order Value) in a quarter in two financial years in India. 

Zomato Gross Order Value | IPO Analysis.
Gross Order Value

After that, the company saw a good recovery in terms of GOV. From 1st quarter to 3rd quarter almost 19,000 million GOV rose.

Basically, Covid-19 had a good impact on Zomato. Where the other industries got hits due to Coronavirus, Zomato gets benefited. Almost every theatre, Restaurants was not allowed to open for the customers. But they were still delivering their foods via food delivery businesses like Zomato, Swiggy. People were giving more orders to change their daily homemade food tastes. We all were unable to visit any theatre or simply meet our friends in restaurants, instead, we were ordering more food and this was making us happy. This way Zomato gets benefited.

Industry Outlook

Indian Food Service market is to a great extent partitioned into 3 diverts- Dine in, Take away, food conveyance, or food delivery. Among these, the food conveyance business is required to see the most noteworthy development in coming years, as indicated by CLSA. The market size is expected to grow 11 billion dollars in 2026 from 3.5 billion dollars in 2020.

Higher frequency from existing orders, Increasing market, smartphone penetration to increasing population all are going to help this industry.

Zomato’s biggest competition in India is Swiggy. Except for the food delivery model, these two companies have a different set of approaches. Where Zomato mainly focuses on every aspect of the restaurants, Swiggy focuses on food delivery aspects, like foods, books, alcohol, grocery, meats, medicine, etc.

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Financials

Zomato reported a loss in the first nine months in FY21. But the company has close to no debt. They have secured 155 million orders in the same time period. And the total gross value of orders stands more than six thousand crores. In FY20 Zomato received nearly 405 million orders with the GOV of more than 11 thousand crores. The average value has gone up from 278 Indian rupees per order to 398 rupees per order in the nine months of FY21.

Zomato profit per order comparison | IPO Analysis-

Let’s compare the total revenue per order and total cost per order between FY20 to FY21 (first 9 months). If we observe the table the total revenue has increased to 89.6 rupees from 58.9 rupees. Where the total cost per order has decreased to 66.7 from 89.4. So they had a loss of 30.5 rupees per order in FY20, they managed to get back on track and making a profit of 22.9 rupees per order.

*But it is to note that branding, marketing, and advertising costs are excluded from this.

Get the PDF file for the FY20 Zomato financial

Strength of Zomato

Firstly, network-effect. This is the biggest strength of Zomato. The network effect is a phenomenon wherein the product or the services get extra value when more people visit the platform. This way Zomato can attract more restaurants to list their business in Zomato.

As of 31st Dec 2020, the company had around 1.6 lakh delivery partners. In the same year, the delivery partners fulfilled almost 95 percent of all orders with less than 30 minutes of delivery time. The Company has the potential of an on-demand hyperlocal delivery network.

Secondly, Strong Brand Present. Zomato has a strong brand presence. It has been recognized all over India. Zomato has been successful in retaining customers and the spending time is also increasing.

Weaknesses

The company isn’t profitable yet, and it will be the same for few more times as the company is increasing its spending. Although it has mainly one big competition Swiggy you should know that one more big threat is coming on the way, ‘Amazon’. This can be a big problem for both Swiggy and Zomato. We will talk about this in a few moments.

Zomato is backed by China’s billionaire Jack Maa’s Ant Group. The company has said that it will remain to be a foreign-owned and controlled company. This means the company will have to follow the FDI (Foreign Direct Investment) rules and laws.

Amazon- The threat for Indian food delivery companies

Amazon has already started its marketing of food delivery last year. First, they started food delivery only for the employees in Bangalore now almost one-fourth of Bangalore it had covered. It has a network of over 2,500 restaurants, though it is way less if you compare with Zomato offered 15,000 restaurants. But it has just started and we all know Amazon’s potential. We think Swiggy and Zomato need to watch out.

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