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Multi-Act Fast growing segment with a likely duopoly industry structure. Covid-19 induced changes have led Advisory: to higher growth in FY21 and also an improvement in unit economics, however operating metrics and financials clearly suggest food delivery as far from being profitable and cash flow generative business, from a long-term perspective. Though both the market leaders have given signs of being mature in competition, Zomato might face investor/market pressure of being profitable (getting listed) while Swiggy, can continue to focus on growth (remains unlisted). Zomato’s upcoming IPO (one of the largest consumer internet company) might attract higher interest/participation, but any listing gains likelihood herein should be seen in context of its extremely high valuation multiples. Company Zomato is a restaurant aggregator and food delivery company. It provides, information, menus, and user reviews of restaurants as well as food delivery options from partner restaurants. As of Mar-21, 3.9 lakh active restaurants from 525 cities in India were listed on Zomato. Company also operates in 23 other countries, however, it has taken a strategic decision to focus only on Indian Market going forward, as 90% of the revenue comes from India.

Offering Type Entry Description Food delivery business, with the stakeholders being customers, delivery partners and Food Delivery B2C 2015 restaurant partners. Used to search/discover restaurants, read/write customer reviews, view/upload photos, Dining Out B2C 2008 book tables and make payments while dining out at restaurants. Company sources fresh, hygienic, quality ingredients from farmers, mills, producers, and Hyperpure B2B 2019 processors to supply to its restaurant partners. (Traded Goods) Paid membership program with benefits like flat discounts at select restaurants in food Zomato Pro (Gold) B2C 2017 delivery/dine-out.

Client Advisory - High Buzz! Very High Valuations!!

Following is the bifurcation of revenue of the company

Revenue by offerings - FY20 Revenue by Geography - FY21

(N/A for FY21)

4% Delivery 14% India 6%3%

Dining Out (Includes 82% Zomato Pro) UAE

B2B Supplies Upto 2016, advertising revenue was the primary source for Zomato as it contributed 91% ~90 -100% of revenue. However, since 2017 delivery business expanded and now contributes ~80% to the total revenue. Following table depicts the changeROW in revenue mix:

Revenue Share 2016 2017 2018 2019 2020 2021 Delivery 4% 18% 56% 76% 82% N/A Dining Out (Includes Zomato Pro) 96% 82% 44% 23% 14% N/A B2B Supplies - - - 1% 4% N/A Total 100% 100% 100% 100% 100% N/A

Industry The Indian Online Food Delivery Services Market has grown at ~58% CAGR during 2017-2020 to reach $ 3.6 Bn and is expected to grow at ~27% CAGR during 2021-26. However, Food delivery accounts for just 6% of total food service market in India. This is expected to increase to 13% in FY26 as per CLSA. Over the years, the market has seen significant consolidation, from 7 players in 2015 to just 3 players in 2020. There is a virtual duopoly in the market with Swiggy and Zomato capturing 92% of market share. Amazon entered the market in 2020.

Market Share as per CLSA 2020 Swiggy 47% Zomato 45% Others 8% However, certain other reports consider Zomato’s market share to be 50-55%, i.e higher than Swiggy. Market share of Zomato has increased over the last 3-4 years, in terms of GOV (Gross Order Value).

Profitability & Accounting change: Operating margins of the company have been negative and quite volatile. These improved (though negative) till 2018 due to operating leverage. However, in 2019 as delivery business expanded significantly, margins deteriorated, since company started delivering through partners and set up support centers. Earlier it used to deliver using third party delivery providers, including restaurants themselves. There has been a substantial improvement in the fundamentals during FY21. Dining out business of the company remains profitable with EBITDA margins of 32% & 43% in FY19 and FY20.

2013 2014 2015 2016 2017 2018 2019 2020 2021 Operating Profit Margin -95.5% -139.0% -168.5% -265.1% -79.1% -26.1% -174.2% -91.7% -30.2% Net Profit Margin -87.5% -121.5% -152.4% -254.5% -73.1% -24.0% -166.5% -86.1% -25.9% RONW -17.6% -15.9% -25.7% -80.7% -119.0% -9.2% -84.1% -107.5% -6.4%

Client Advisory - High Buzz! Very High Valuations!!

Change in accounting: In mid-2020, company changed its accounting policy of recording delivery charges, delivery costs and advertisement cost, but the impact of it on revenue and operating profits was minimal. However, the net impact is that certain costs were transferred from outsourced support costs to advertisement costs. Based on our calculations using the unit economics provided and reported figures, the following is the bifurcation of outsourced support costs:

Outsourced Support Costs: 2020 2021 Growth Delivery charges 3,598 - Availability Fee 14,794 4,467 Other outsourced support costs 2,546 1,431 Reported 20,938 5,899

No of Orders (mln.) 403 239 Availability Fee/Order 37 19 -49.0% Call Centre costs and others/Order 69 77 10.3% Decline in availability fees by ~50% is unexplained and may not sustain.

Operating Metrics: Company expanded from 15 cities in 2018 to 525 cities in 2021. As a result, number of Monthly transacting users increased at a CAGR of 96% during 2018-21. Consequently, number of food delivery orders grew at CAGR of 98% during 2018-21. Average order value (AOV) declined from Rs 436 to Rs 278, as the company expanded to smaller cities where AOV is lower. However, it improved to 397 in FY21 due to bulk orders and listing of premium restaurants during Covid-19. Due to this, GOV grew at a comparatively lower CAGR of 92% during 2018-21. The share of transacting users as a % of active users has also increased from 7% to 21% during the same period.

2018 2019 2020 2021 CAGR (18-21) Number of cities served 15 200 500 525 Active Food Delivery Restaurants 33,192 94,286 1,43,089 1,48,384 65% Orders - Mn 30.6 191 403.1 238.9 98% Gross Order Value (GOV) - Mn 13,341 53,870 1,12,209 94,829 92% Average Order Value (AOV) 436 282 278 397 -3% Average Monthly Active Users (MAU) - Mn 13.8 29.3 41.5 32.1 33% Average Monthly Transacting Users (MTU) - Mn 0.9 5.6 10.7 6.8 96% Transacting Users as a % of Active Users 7% 19% 26% 21% Average monthly frequency of MTUs 2.83 2.84 3.14 2.93 1.1% Active Delivery Partners 8,000 1,50,000 2,30,000 1,69,802

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Change in unit (per order) economics:

Following factors were responsible for increase in contribution per order from Rs -30.5 in FY20 to Rs 20.5 in FY21: ▪ Higher-end restaurants listed on Zomato/ Swiggy pushing up order values. Large families staying together also increased order value. ▪ Due to lockdowns and preference for safety, consumers were willing to pay delivery charges and accept lower discounts, as dining out was not a preferred choice. Note that the above unit economics do not consider fixed and other costs like employee costs, advertisement, etc. because of which Zomato is still in losses at operating level. Also, management does not believe that the current contribution margin is sustainable in the long term. This is because atleast some customers might refrain from paying delivery charges and would search for discounts once situation normalizes. Also, restaurants may not pay higher commissions that they are paying now. Management expects long term sustainable contribution per order to be Rs 15-20 as against Rs 20.5 for FY21.

Impact of Covid-19: The food delivery business was significantly impacted in Q1FY21 due to lockdowns across the country. Company recorded Gross Order Value (GOV) of Rs 10.9 Bn, the lowest in last two financial years. From the end of May-20, the food delivery business started recovering, and in Q4FY21, the quarterly GOV reached all time high of Rs 33.13 Bn.

Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Gross Order Value (Mn) 27,853 26,849 10,936 20,952 29,810 33,130 Growth QoQ -3.6% -59.3% 91.6% 42.3% 11.1% On the other hand, the dining-out business is still recovering as customers continue to be reluctant to dine-out as a precautionary measure. Zomato Pro subscriptions also declined from 1.7 Mn in Mar-20 to 1.5 Mn in Mar-21, indicating that members did not renew their subscriptions during the pandemic. However, Average order Value for food delivery has increased during the pandemic.

Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Average Order Value (AOV) - Food Delivery 265 273 292 287 378 394 408 395

Reasons for increase in Average order value could be: ▪ Listing of high-end restaurants (having high AOV) on Zomato platform during the pandemic. ▪ Consumer shift to bulk ordering behavior for families instead of individuals, as bachelors moved to their hometowns. ▪ Increase in the prices by restaurants to cover the increased commissions.

Sustainability of this increase in AOV is questionable, once the pandemic is under control.

Client Advisory - High Buzz! Very High Valuations!!

Key Business Growth Drivers ▪ Rising Urbanization would enable more people to access food delivery services. ▪ Increase in share of food ordered online: Currently this is just 6% in India compared to 10% and 13% in US and China. ▪ Expansion to new cities and restaurant partners: An expansion into Tier 2/3 cities can improve profitability as delivery costs are lower by 50% compared to 20% lower order value. ▪ Increase in ordering frequency of existing users. ▪ Growth of Cloud Kitchens which offer their food only through take away or delivery. ▪ Macro factors like overall population expansion & Rising disposable Income.

Key Risks: ▪ Amazon's expansion or entry of another player with strong promoter/investor may delay the move towards profitability for existing players. This is because new players would burn cash at higher rates to capture market share, which the incumbents would have to follow. ▪ Companies like Dotpe help restaurants create their own pages/websites, where the order experience UI can be similar to food delivery applications. These apps do not charge commissions based on order value, because of which restaurants do not increase their prices. The delivery is undertaken by any delivery partner, for e.g., Dotpe has partnered with five delivery partners including Shadowfax, Dunzo, and Delhivery. Key benefit of this model is that restaurants save on commissions, while customers get their food at usual prices. Delivery fees are charged similar to food delivery apps. However, customer might still prefer food delivery apps, due to the variety of food items they offer from different restaurants.

Peer Comparison: ▪ Swiggy as well as global peers are not earning returns above cost of capital. Most of the peers are not profitable, as can be seen in the following operating margins comparison:

Operating Margin (EBIT) 2015 2016 2017 2018 2019 2020 Meituan Class B -211.0% -50.0% -13.0% -18.0% 0.0% -3.0% DoorDash, Inc. Class A -72.0% -70.0% -12.0% Just Eat Takeaway.com N.V. -23.0% -16.0% -14.0% -15.0% -7.0% 0.0% Delivery Hero SE -105.0% -49.0% -48.0% -36.0% -53.0% -37.0% Grubhub, Inc. 18.0% 17.0% 14.0% 9.0% 0.0% -6.0% Zomato Ltd -168.5% -265.1% -79.1% -26.1% -174.2% -91.7% Swiggy -677.2% -158.6% -98.2% -222.2% N/A DEMAE-CAN CO.LTD. 15.0% 14.0% 16.0% 15.0% -1.0% -25.0%

Observations from International Markets: ▪ Developed market players focus on raising average order value (AOV), while those in emerging markets focus on increasing order volumes. The AOV for developed countries has been in the range of $16-25, compared to $4-7 for countries like India, China, and Philippines. ▪ As users mature, transaction frequency per user increases over time. ▪ Local players have performed better in different geographies due to their logistics network. For E.g Meitun/Ele.me in China, DoorDash in US, JustEat/Deliveroo in UK, Swiggy/Zomato in India. Only exception is Delivery Hero, a multi country operator. ▪ Market Structure remains consolidated. For e.g. Just Eat merged with Takeaway and the combined entity is in the process of acquiring Grub Hub. ▪ Players diversify into different categories to supplement their commission revenues. ▪ E-Commerce players present a threat. For E.g Amazon in India, Coupang in South Korea.

Client Advisory - High Buzz! Very High Valuations!!

Zomato Vs Swiggy:

Criteria Zomato Swiggy Entry into Food Delivery 2015 2014 ~80%. Management aspires to increase non-food Food Delivery revenue share ~80% delivery revenue share to 45% in next 3-4 years. Other Offerings Dining Out, Hyperpure Delivery of Grocery, Meat, Milk, Swiggy Genie. Subscription Zomato Pro (Gold) Swiggy Super Number of cities 556 523 Restaurant Partners 1,43,089 1,60,000 Delivery partners/riders 2,30,000 2,40,000 Market Share 45% 47% Infoedge (18.7%), AliPay (8.4%), AntFin Key Investors Prosus (40%) (8.3%), Uber BV (9.2%) Valuation USD 5.4 Bn (Feb-21); (USD 8.6 Bn – IPO) USD 4.9 Bn (Apr-21) – EV/Sales: 10.8 x (2022 sales) Cash Burn (2016-20) Cumulative OCF -44,970 -66,984 OCF as a % of sales -92% -160%

Cash burn of Zomato is lower than that of Swiggy. While Zomato spends more on advertisement than Swiggy, Swiggy has higher employee cost and other expenses than Zomato. Another factor is that Zomato had to be frugal owing to lack of sponsor like Prosus, which regularly funded Swiggy.

Capital Allocation Issues: ▪ Company acquired Urbanspoon in 2015 for $52 Mn. Within 5 months of acquisition, Urbanspoon was shut down. Zomato CEO said that the critical asset was its userbase, which was migrated to Zomato. During 2016 and 2017, Rs 2,472 Mn of goodwill and 452 Mn of intangibles were impaired. This impairment could be mainly pertaining to Urbanspoon, since that was Zomato’s largest acquisition at that time. ▪ In Nov-18, company acquired Tonguestun Food Networks, an Online marketplace for enterprises to discover, engage and manage food. Entire goodwill on acquisition of 824 Mn was impaired in FY19 (along with 134 Mn pertaining to Nextable acquisition in 2015), the immediate next year with a comment that the group is not able to determine value of expected benefits with reasonable certainty over the foreseeable future & due to certain changes in business and economic conditions, management believes that the expected benefits longer to accrue than initially estimated. Note that the acquisition was made at P/Sales multiple of 12.4x.

IPO Details: The IPO size is 9,375 Cr, of which 9,000 Cr is fresh issue and the balance 375 Cr is offer for sale by Info Edge. Of the 9,370 Cr, company plans to use 6,750 Cr for funding organic and inorganic growth and the balance for general corporate purposes. Company intends to use atleast 40% of the 6,750 Cr, for organic growth, which includes the following: ▪ Customer and user acquisition: This includes acquisition and retention costs like discounts offered and refunds, as well as advertising and branding initiatives. ▪ Delivery Infrastructure: Includes investments in expanding and building capabilities across delivery partner network through expenses like incentives, support expenses, insurance, etc. ▪ Technology Infrastructure: Investments in platforms through which company offers its products & services.

Client Advisory - High Buzz! Very High Valuations!!

Pre-Offer share shareholding structure of the company is as follows:

Shareholders Jul-21 Info Edge (India) Limited 18.7% Deepinder Goyal 5.6% Foodiebay Employees ESOP Trust 4.2% Alipay Singapore Holding Pte. Ltd. 8.4% Uber B.V. 9.2% Antfin Singapore Holding Pte. Ltd. 8.3% Internet Fund VI Pte Ltd 6.0% SCI Growth Investments II 6.0% D1 Master Capital Partners LP 3.8% MacRitchie Investments Pte. Ltd. 3.7% Others 26.2% Total 100.0%

Valuation

We have not valued the company, in the absence of reliable estimates, adequate financial and trading history. Older financial history is not useful since the revenue mix has changed considerably.

Post IPO valuation at the higher end of price band is Rs 64,365 Crores (USD 8,628 Bn), implying an EV/sales of ~20x FY22 sales, and 14x FY23 sales. Zomato seems to be getting significantly higher multiples due to opportunity landscape in India.

EV/Sales 2022 2023 Zomato 19.6 13.9 Meituan Class B 6.5 5.0 DoorDash, Inc. Class A 12.4 9.7 Just Eat Takeaway.com N.V. 2.7 2.3 Delivery Hero SE 3.8 2.7 DEMAE-CAN CO.LTD. 3.6 2.7 Jubilant Foodworks Limited 9.4 8.0 Westlife Development Limited 5.3 4.2

Annexure: Additional insights from meeting with Ex-Zomato Employee: ▪ The order frequency is 3.8 to 4 times per month in Tier-1 cities, about 3 times in Tier II cities and 2.4-2.6 times in Tier III cities. ▪ Direct deliveries from QSRs like McDonalds, Burger King, and others would continue to run parallelly like today and are not a threat. QSRs account for 15-20% of total revenues, so even if they run parallel apps, the impact will not be much. ▪ Take rates are not expected to increase, neither are they expected to come down. For certain cloud kitchens, where Zomato provides platform, take rates can be 30% or more. ▪ Industry can expect a 30-35% volume growth and 40-45% revenue growth for foreseeable future. Food service industry is itself growing at 8-10%, and he expects an additional 2-3% monthly growth in food delivery space. ▪ Young customers (18-25) contribute ~50% to volumes and their frequency is ~20% more than other customers. ▪ If 100 customers use Zomato for the first time, only 25 of them remain active after 6 months. However, these 25 customers who stayed with Zomato increase their spending 5-6 times after say 7-12 months. 30% of the current user base constitutes matured users. ▪ Amazon seems to have second thoughts on whether to continue. Hence, he does not consider it to be a big threat.

Client Advisory - High Buzz! Very High Valuations!!

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