June 2021 Sector Report

Internet f cus Zomato: Delivering convenience

Pranav Kshatriya Nihal Mahesh Jham +91 22 4040 7495 +91 22 6623 3352 Pranav.Kshatriya@edelweissfin.com Nihal.Jham@edelweissfin.com

Sandip Agarwal Pulkit Chawla +91 22 6623 3474 Pulkit.Chawla@edelweissfin.com Sandip.Agarwal@edelweissfin.com Edelweiss Securities Limited Internet

Contents

Executive Summary ...... 2

Ordering frequency- Key Driver of LTV ...... 5

Quality of Network Effects ...... 12

Dissecting disintermediation ...... 15

Large addressable market ...... 20

QSRs: Beneficiaries with a caveat ...... 24

Business Model ...... 30

Financial Outlook ...... 34

Valuation ...... 41

Key Risks ...... 46

Global Peer Set ...... 47

Management Overview ...... 62

Financials ...... 64

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Executive Summary

Zomato IPO is shaping up as a landmark: the first IPO of an India-based large-scale consumer platform. In its essence, the upcoming IPO shows investors’ hunger to pay top dollar, at rich valuations, for a fast- growing food delivery business in a large addressable market. Indeed, Zomato is well-entrenched and fast-growing, but also loss-making. Our menu for this note includes sizing up emergence of food delivery platforms globally (Meituan, Doordash, Deliveroo) and decoding Zomato’s success recipe using our proprietary three-pronged framework, comprising: i) quality of network effect; ii) consumer lifetime value (LTV); and iii) total addressable market. (Link) Food delivery platforms presuppose network effects, which drive scale. But that’s much weaker than other global platforms due to local clustering, which means food platforms seldom have pricing power— thereby curtailing profitability. Global insights indicate consumers love the sheer convenience of online food ordering, leading to higher ordering frequency, which drives growth and – eventually – profits. For restaurants, delivery platforms are a necessary evil: a lower- margin channel that also cannibalises dine-in, but expands catchment and drives incremental business. Restaurants/QSRs (McDonald’s, Domino’s) are hence trying to disintermediate delivery platforms, but it’s a tall order—to emulate convenience, variety and experience offered by platforms. Meanwhile, we do view Swiggy as a worthy competitor: smaller, backed by marquee investors and growing faster. Zomato’s success rests squarely on its execution vis-a-vis Swiggy. On balance, we have an optimistic growth outlook for food delivery platforms in India and their unit economics. Zomato’s valuation has high sensitivity to average order value (AOV), and we peg its valuation at USD7–9bn (base case: USD8.1bn, 49% premium to its last funding round). A notable dip in AOV due to single orders – instead of family orders – and rising discounts due to increased competitive intensity are the key risks to unit economics, and valuations.

A plateful of levers: A classical aggregator model For a small fee, food delivery platforms offer consumers a variety of food choices, ease and a consistent ordering experience. Restaurants gain from starkly larger catchment and an on-demand delivery fleet. But, since food delivery platforms have higher market power, they can tweak commissions for restaurants as well as delivery partners, or even delivery charges levied on consumers, to drive profitability.

A platform’s stickiness also drives higher advertising revenue from restaurants. Food delivery platforms also typically run loyalty programs that reduce delivery charges, but ensure higher ordering frequency. Hence, we see food delivery platforms operating on an asset-light model with high consumer loyalty, which gives them a plateful of levers to drive unit economics.

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Main ingredient: Convenience drives ordering frequency, LTV Food delivery platforms’ LTV is driven by: i) average order value (AOV); ii) take rates; iii) delivery charges; iv) average ordering frequency; and v) churn rate. Of these, we note that ordering frequency is the key driver of LTV; other parameters largely settle at a steady state after initial improvements.

In this way, convenience of online ordering and an array of food options on tap are the key drivers of increasing ordering frequency. In fact, AOV has remained broadly flat in most geographies. Take rates tend to increase during initial years and then plateau as platforms focus on on-boarding restaurants. Delivery charges decline as order volumes rise, kicking in efficiencies. However, since these are point-to-point orders, there are limits to efficiencies. Churn typically dips as customers tend to gravitate towards one platform after tasting a few.

Mild flavour: Network effect modest…you get scale, not pricing power Network effect in food delivery platforms is limited due to local clustering, commoditised offerings and vulnerability to multi-homing. Network effect for food delivery platforms are somewhat similar to ride-hailing and is lower than global platforms in messaging, social media, etc. Typically one large player dominates even in large markets, such as the US and China, but they have limited pricing power and hence low profitability. Local clustering thus has had a fallout: even reasonably well established players in a local market can lose market share as newer players with more efficient offerings enter. Hence, operational excellence by driving down delivery costs, among others, is critical to maintaining leadership and profitability.

Alternative recipe? Yes, but risk of disintermediation low With restaurants’ revenue from food delivery platforms rising materially during the pandemic, their profitability was hit due to high take rates. Hence, restaurants are trying to orchestrate the direct food delivery platforms by collaborating with SaaS- based ordering platforms and third-party delivery services. While overall consumer experience is satisfactory, we believe most standalone restaurants do not have the financial and marketing wherewithal to drive orders through their own platforms.

Many payment apps such as PhonePe, Paytm and GPay are aggregating direct delivery platforms, restaurant discovery and ordering experience remain much poorer than specialised food delivery platforms. On the whole, risks of disintermediation are low for food delivery platforms, although a portion of high- value ordering such as gourmet food and bulk orders may shift to direct delivery.

Stomach for more? Indian food delivery market can gulp lots more Online food delivery platforms are at a nascent stage in India with an industry size of meagre USD4.2bn (USD21bn for USA, USD90bn in China). It is, however, growing rapidly in the country with food delivery reporting a staggering 147% CAGR over FY18–20. However, with the pandemic nibbling away at the business, the industry had to swallow a 41% decline. Even so, growth is phenomenal and driven by increasing adoption of food delivery platforms, rising ordering frequency, and an expanding proportion of restaurant food consumption versus home food. We believe adoption of food delivery platforms in India will be a function of user education, availability and ease of payment options, and reach of platforms. Since India has only 45–55mn online food delivery users compared with 740mn mobile data connections, online food delivery platforms has swathes of space for penetration that can fuel its growth for a long time.

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Culinary comparison: QSRs are beneficiaries with a caveat Zomato’s public filing has some interesting trends from the restaurant/QSR perspective. We note the following. i) Jubilant FoodWorks’ recovery has been similar to Zomato’s GOV, pointing to the strength of its delivery-based model. (QSR: The Right Combo) ii) Active competition has not reduced as initially thought. iii) Platforms are a long-term enabler for the sector. That said, it is a lower-margin channel than dine-in. Incremental business drives profit but cannibalization impacts negatively. We also compare JFL with Zomato —similarities aside, the two business models are fundamentally different with Zomato’s being more scalable.

Tempting aroma: Consumers globally are loving food delivery We note that evolution of online food delivery is different across players and geographies, but with a few similarities. Many companies such as Uber, Grab and Gojec got into food delivery because they already had riders that could deliver food. Players such as Zomato went from restaurant listing to delivery, while a few like Swiggy and DoorDash started as online food delivery platforms. Almost all delivery platforms across the globe have seen a huge spurt in delivery volumes riding on consumer convenience. However, we also note that most delivery platforms make losses at operating level; even the most matured ones work at meagre operating margins, e.g. Meituan at 4.2%.

Foodies can surprise: High growth driving up valuation Zomato’s global peers trade at 2–12x 1-year forward price to sales. The multiple is contingent on growth potential of a market and market share of the player. For Zomato, we use a two-stage DCF model, which yields a value of INR581bn (USD8.1bn). Our assumptions: 32% revenue CAGR over FY21–30, 10% FCF growth for next eight-years and 10% for second-stage, and 4% terminal growth. The valuation has high sensitivity to AOV; for instance, a 10% lower AOV will suppress valuation by 22%. We believe Zomato’s valuation depends on its ability to sustain and fortify its leadership in the Indian food delivery market. For perspective, Swiggy is slightly smaller than Zomato, but has delivered stronger growth; hence, for Zomato to sustain valuations, it must gear up.

Rigours of recipe: Key risks As online food delivery, and the gig economy in general, is at an early stage of development, the ecosystem is evolving and there are risks to watch out for: i) unfavourable regulations curtailing pricing or increasing delivery costs etc; ii) increase in competition, leading to weaker unit economics and higher costs, would impact profitability; iii) deeper-than-anticipated fall in AOV; iv) delivery and other cost escalations and inability of platform to pass them through; and v) despite low odds of success for direct delivery, an unlikely success can potentially disrupt food delivery platforms’ business models, including Zomato’s.

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LTV = f(ordering frequency)

 Convenience of online ordering is driving ordering frequency, which is the most important driver of LTV.

 LTV = [Average order value (INR) X take rate (%) – Delivery charges (INR) – Discounts (INR)] X Average ordering frequency/ Churn  Average order value (AOV) tends to remain steady under normal circumstances. Zomato savoured an AOV surge during the pandemic as: i) more family ordering took place than individual ordering; ii) premium dine-in restaurants joined the food delivery platform bandwagon; and iii) consumers showed increasing preference for hygienic restaurants, even though more expensive. To be sure, some of these factors are temporary, and might reverse.  Delivery charges tend to dip as ordering volume rises, bringing in efficiencies. However, as these orders are point-to-point orders, there are limits to which efficiencies can be extracted.

In our last Internet report Decoding platform economy, we had laid out the framework for evaluation of platform businesses on the basis of three parameters: i) LTV of customers; ii) the quality of network effect; and iii) total addressable market. We are using the same proprietary framework for evaluating Zomato.

Ordering frequency: Biggest driver of LTV Convenience of online ordering driving LTV Consumer lifetime value is one of the crucial parameters in determining the valuation of the company. Below equations shows the LTV of customers, which is a function of the following terms: i) AOV; ii) take rates; iii) delivery charges; iv) average ordering frequency; and v) churn rate. LTV= {Average order value (INR) X take rate (%) – Delivery charges (INR) – Discounts (INR)} X Average ordering frequency/ Churn We note that LTV is largely a function of AOV and ordering frequency since other parameters largely settle at a steady state after initial improvements. Globally, we have seen improving average ordering frequency as the biggest driver of LTV while churn dips as customers tend to gravitate towards one platform after trying a few of them. Average order value has largely remained flat in most geographies. Besides, platforms have cut down on the discounts for attracting consumers and driving repeat orders. Besides, these platforms have increased the take rate as restaurants also see the benefit of higher asset turnover. Delivery charges are seen declining with increasing ordering volume bringing in efficiencies. However, as these orders are point-to-point, there are limits to which efficiencies can be extracted. Average ordering frequency is rising across the globe Across the globe, cohorts tend to indicate that popularity of food platforms continues to be on the rise. This trend has been consistent across both developed and emerging countries. Not only are the total number of users rising rapidly, the frequency of ordering has been on an uptrend across the world. GrabFood, which has seen a sharp increase in GMV per user cohorts across users. While average order value grew substantially only in 2020, average ordering frequency has been the major driver of GMV per user cohort. Similarly, the cohort for Doordash shows that the marketplace GOV from each customer cohort has gone up year after year. Also newer cohorts are spending

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higher. For instance, spend of 2018 cohort in Year 2 is higher than that of spend of 2016 cohort in year 4 and 2017 cohort in year 3.

GrabFood – GMV per user cohort DoorDash – Marketplace GOV cohort

Source: Company Source: Company

In China, Meituan’s ordering frequency almost tripled over the last five years. Coupled with rapid growth in new users, this has been the primary driver of growth for its gross merchandise value (GMV).

Meituan – Rising average transactions per user Meituan – Transaction cohort

30 27.4 28.1

25 23.8

20 18.8

15 12.9 10.4 10

5 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, Edelweiss Research Source: Company, Edelweiss Research Average order value (AOV) trends are mixed While GMV has increased across companies, not many of them have seen any meaningful increase in their AOV. Rather, there is no clear trend in the AOV across the board. DoorDash and Delivery Hero in developed markets have seen a drop in their AOVs over the last few years. On the other hand, Meiutan has seen a 14.3% AOV CAGR over the last five years, but the AOV spurt was in the initial two years while the three-year CAGR is barely 3.7%.

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No clear trends in AOV across global companies (rebased to 100)

200

170

140

110

80

50 FY15 FY16 FY17 FY18 FY19 FY20

Meiutan Doordash Just Eat Takeaway Delivery Hero Grubhub

Source: Company, Edelweiss Research Zomato AOV spurt led by family, premium ordering

Zomato’s AOV increased 32% in Q1FY21 to Zomato witnessed a 32% increase AOV post lockdown announcement as highly INR378, from INR287 in Q4FY20 as lockdown mobile young professionals started working from home and they tended to order resulted in larger ordering for family, and for the family, instead of ordering for an individual. Also, premium restaurants, ordering from premium restaurants which were solely for dine-in patrons, were forced to list on food delivery platforms in the wake of pandemic. Yet another reason that can be attributed to the increase in order value is customer preference for premium restaurants, which tend to have higher hygiene standards.

Spike in Zomato's AOV during pandemic

450 407 394 378 360 292 287 265 273

270 (INR) 180

90

0 Q1 FY20 Q2 FY20 Q3 FY20 Q4 FY20 Q1 FY21 Q2 FY21 Q3 FY21

Source: Company, Edelweiss Research

That said, we expect AOV to trend down once the economy starts opening up and more individuals start ordering (as opposed to families). Furthermore, expansion into newer cities is expected to exert pressure on the average order value. However, we expect AOV to come down by only 6% in FY22 to INR360 (from INR381 in FY21) and remains higher than the pre-pandemic level. We note that the low pre- pandemic AOV was also supressed due to food delivery platforms promoting flat- priced meals and affordable single-serve meals, which may not come back. Moreover, we expect the pandemic to drive more users to more hygienic

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restaurants, which tends to be more expensive. Hence, we do expect AOV to reduce to INR360 in FY22, but will remain higher than the pre-pandemic level of INR280. Take rates tend to stabilise We observe that take rates tend to increase initially and then settle at a steady state. Food delivery platforms begin with lower take rates to incentivise restaurants in a bid to on-board them. As they business starts picking up, they tend to increase take rates to cover the cost of delivery, promotions, etc.

There can be a difference among take rates across platforms in a country. While companies such as Deliveroo and Delivery Hero have the highest take rates in the world (25–30%), the take rate for DoorDash and Uber Eats would be in the vicinity of 11–14%. Meituan’s take rate (13–14%) is also among the lowest across countries. We attribute the lower take rates in China to higher penetration, denser population driving down costs, and higher competition.

Take rates – A global view

35 29 28 22.8

21 (%) 13.6 12.9 14 11.7

7

0 Deliveroo Zomato Meituan Uber Eats DoorDash

Source: Company, Edelweiss Research

While take rates have been rising over the last few years, we need to be cognizant that this trend is unlikely to continue for long. There has been opposition from restaurants and regulators alike, who feel the need to protect restaurants from higher take rates charged by aggregators. In fact, several cities including New York, San Francisco, Las Vegas, Washington, etc. had put a temporary cap on delivery commission to protect interests of restaurants during the pandemic.

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Meituan – Monetization rate Uber Eats – Take rate

15% 14.0% 25% 13.5% 13.6% 22% 12.3% 20% 12% 20% 18%

9.0% 9% 15% 12.90%

9.70% 6% 10%

3% 5% 1.1%

0% 0% FY15 FY16 FY17 FY18 FY19 FY20 2016 2017 2018 2019* 2020*

Source: Company, Edelweiss Research Source: Company, Edelweiss Research *Uber started combining Uber Eats in Delivery segment and changed the definition from 2019 onwards. Hence, prior years are not comparable Deliveroo – Take rate DoorDash – Take rate

32% 12% 11.7%

31% 12% 30% 30% 11.0% 29% 29% 29% 29% 11%

28% 28% 11% 10.3%

27% 10%

26% 10% FY15 FY16 FY17 FY18 FY19 FY20 FY18 FY19 FY20

Source: Company, Edelweiss Research Source: Company, Edelweiss Research Take rates of Indian companies: Already elevated

Take rates of Indian companies, including Indian companies such as Zomato and Swiggy currently charge a take rate of 22– delivery charges, are 22–25%, while for 25%, which is on the higher side globally and among the highest in developing global peers they range from 11–30% countries. Higher take rates can spur risk of disintermediation, as well as new competitors entering the segment. Amazon is also eying this segment by offering half of the current take rate. However, since Amazon does not have a different cost structure, we believe these introductory take rates will be neither sustainable nor scalable. This, at best, may keep industry profits low till competition wanes out. Zomato follows a different commission structure based on the type of restaurant. While non-chain restaurants pay a much higher commission, outlets part of a chain pay lower. At present, the commission rates vary anywhere from 18–40% of the order value. The amount depends on parameters such as order size and restaurant type. Companies such as Jubilant FoodWorks (JFL), which lists on the platforms like Zomato to receive orders but deliver through their own fleet, pay a 6–8% commission.

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Estimated commission take rate

30 24-26 24

18

14-16 (%) 12 6-8 6

0 Only Listing/Self Delivery Large Chains Non Chain Restaurants

Source: Edelweiss Research

One of the key concerns of restaurants has been a potential further increase in take rates by food platforms would eat into their margins. However, a comparison of Zomato’s historical take rate trends, comparison with global peers and also Amazon’s potential entry in this segment (pilot underway in Bangalore), we expect steady take rates. Delivery costs economises with scale Companies have been focused on reducing delivery cost per order by taking several initiatives. For instance, Zomato has seen a steady decline in its last-mile delivery costs. The delivery cost comprises payment to delivery partners along with an availability fee. Reduction has been achieved by a combination of higher throughput and lowering of availability incentives.

Zomato – Delivery cost per order trending down

100

88 86

76

65 (INR) 64

52 52 45

40 FY18 FY19 FY20 9MFY21

Source: Company, Edelweiss Research

However, once companies undertake steps to optimize delivery costs per order, these costs generally stagnate at a certain level. For instance, Meituan in China has seen its delivery rider costs now stabilize within RMB4.5–5. Given these are point- to-point deliveries, optimization and economies of scale can be improved only to a

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certain extent and idleness of a rider cannot be reduced beyond a degree. Due to this, cost per order has started increasing for Meituan.

Meituan- Delivery cost per order

6

4.9 4.8 4.7 4.8 4.5

3.6 3.2 (RMB) 2.4

1.2 0.4

0 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, Edelweiss Research

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Quality of network effect is modest

 The network effect in food delivery platforms is curtailed due to local clustering, commoditised offerings and vulnerability to multi-homing.

 Network effect for food delivery platforms is somewhat similar to ride hailing and is lower than global platforms in messaging and social media.  Typically a large player dominates food delivery, even in large markets (US, China), but nevertheless has limited pricing power and hence low profitability.

 Restaurants are trying to disintermediate food delivery platforms by going direct, but considering challenges of on-boarding customers on individual restaurant platforms, they may succeed only in gourmet food or high-order value cases.

Network effect helps achieve scale, but pricing power is limited Various factors determine the quality of network effect, such as: i) network clustering (local or global clustering); ii) commoditized or differentiated supply; iii) vulnerability to multi-homing; and iv) risk of disintermediation. Besides, the gradient of customer acquisition cost (CAC) over time series is a good measure of the quality of network effect. Exhibit 14 summarises network effects in case of food delivery platforms.

Scorecard for quality of network effect for food delivery platforms

Parameter Score Remark Food delivery platforms are local in nature as a limited Network clustering Low number of restaurants can cater to a cluster Commoditized or Medium Few exclusive cloud kitchen and restaurants tie-ups differentiated supply Vulnerability to multi- Multi-homing is possible but only a few platforms are there Medium homing and consumer can be locked into with loyalty program Risk of High Risk of disintermediation is real only in high-value items disintermediation Network effect strong enough to drive scale but not pricing Overall Medium power Source: Edelweiss Research Network clustering In terms of network clustering, food delivery platforms are local in nature; these platforms may boast a large number of restaurants but for a customer, only the number of restaurants which can deliver to him matters. Hence, if in one locality a platforms can onboard higher number of restaurants, and have sufficient delivery fleet to match another platform, consumers in that area will want to migrate to that platform basis the better choice. Hence higher number of restaurants at overall level does not add value to the network if the size of the network in certain area is weak. Localisation reduces the barrier to entry and hence there have been examples of existing players losing market share to newer and more efficient players. Despite DoorDash’s late entry in the US food delivery market, it captured a 55% market share on the back of its efficiencies.

Food delivery platforms are local in nature Initially, the US too had more localised monopolies, creating an oligopolistic as limited number of restaurants can cater structure at a national level. Grubhub was a leader at the national level. However, to a cluster DoorDash managed to scale up much faster than any other player during the pandemic with better execution, which was largely around the number of restaurants, delivery speed, etc. This resulted in a nearly 55% market share for

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DoorDash, whereas other players lost market share. We note that even in larger markets, superior execution can rapidly drive market share. Hence in a market like India, which has a long growth runway, better execution to drive growth is key to value creation.

Food delivery market share in US

Source: Bloomberg Second Measure Commoditized or differentiated supply

Food delivery platforms can differentiate via Food delivery platforms tend to fall somewhere between commoditized and exclusive ties-up with local popular differentiated supply. On the one hand, the supply is differentiated because there restaurants, but it comes at a cost are many restaurants and type of foods to choose from. Some platforms even have an exclusive partnership with popular restaurants. But, on the other hand, if all of these food delivery platforms provide more or less the same menu—all restaurants are available across platforms—the supply would get commoditized. The point of differentiation therefore shifts to delivery cost, delivery speed, ease of use and other features. Vulnerability to multi-homing

Food delivery platforms are addressing Multi-homing measures the switching cost of a platform. It simply means how easy multi-homing issues by introducing loyalty is it for users to switch between platforms that provide similar services. Food programs delivery platforms may see multi-homing on both – consumer and delivery personnel side. To reduce multi-homing, companies can opt for loyalty bonus or membership offerings that promotes frequent ordering on one platform, or they can enter into exclusive partnerships with popular restaurants. Some platforms also introduce their own cloud kitchen, which not only increases choice, but also captures a higher portion of value from the transaction.

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Swiggy Super and Zomato Pro – A comparative snapshot

Swiggy Super Zomato Pro INR89 (Bit)/ INR169 (Bite)/ INR329 Price INR200/3 months (Binge) per month  Bit' plan - Five free deliveries per month.  'Bite' plan - Ten free  Up to 30% extra off on food deliveries per month and one deliveries 'Buy One Get One free' from  up to 40% off on each dining Features restaurant partners experience  'Binge' plan - Unlimited free  Faster delivery with top-rated deliveries and unlimited 'Buy valets One Get One free' offers from partner restaurants Cities 80 41 Partner > 7,000 >25,000 Restaurants Source: Company, Edelweiss Research Risk of disintermediation – Low in most cases

Since impromptu and frequent ordering Food delivery platforms, for a small fee, offer consumers choice, ease and consistent drives the bulk of order value on food ordering experience, which has led to rapid adoption among consumers. However, platforms, we believe the risk of for restaurants, food delivery platforms charge a significant commission for availing disintermediation is low a higher catchment area and an on-demand delivery fleet. High take rate impacts profitability of restaurants, especially for high-value orders. Hence, premium restaurants are increasingly looking to connect directly with consumers for food delivery. However, since impromptu and frequent ordering drives the bulk of order value, we believe the risk of disintermediation remains low. Weaker network effect has kept profitability under check Due to local clustering of food delivery platforms, the risk of disruption by a new player remains high. Hence, we note, largest players typically command a market share of 50%-plus in most geographies, but they still operate at low margins. Despite over a 65% market share in the Chinese market, Meituan’s operating profit margin in food delivery is a meagre 4.3%. Most other companies have a negative operating profit. That said, we expect profitability to improve as market matures and larger players create efficiencies of scale, which act as an entry barrier for new players. Operating margin of global companies are low

10 3.6

0 Meituan Just Eat Takeaway DoorDash Delivery Hero -5.2

-10 (%) -15.1 -20

-30

-40 -36.2

Source: Bloomberg, Edelweiss Research

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Dissecting disintermediation

 Restaurants are keen on exploring solutions to reduce their dependence on food delivery platforms considering high take rates that eat into their profitability.

 SaaS-based ordering platforms such as Dotpe and Thrive are creating ordering platforms for restaurants, along with integration of third-party logistics players for order fulfilment.

 While deploying these solutions is relatively easy, pushing consumers to adopt direct ordering is the biggest challenge for restaurants.

 We see large QSRs and chain restaurant with enough resources to drive direct ordering; other restaurants will find it challenging to market their platforms.

Direct delivery – Crucial to restaurants’ profitability

Shift in restaurant business in favour of Although food delivery platforms help restaurants drive volumes, they also create delivery, from dine-in in the wake of the two challenges: i) food delivery platforms do not share customer data with pandemic has eaten into their profitability restaurants; hence restaurants find it difficult to create patronage; and ii) food delivery platforms charge a high fee, which significantly impacts profitability. High fees is a significant challenge for premium restaurants. Many dine-in restaurants do not offer home delivery due to high charges levied by delivery platforms. However, the pandemic has significantly altered the revenue mix for restaurants with dine-in revenue almost entirely going away.

In order to address the issue of consumer data and high commissions, some restaurants are working with SaaS platforms such as DotPe and Thrive to create seamless ordering systems. These ordering systems, if required, can also source delivery fleet from third-party delivery partners such as Dunzo, WeFast and Shadowfax. In order to drive usage of their own platforms, restaurants are leveraging social media platforms, such as Instagram and Facebook for popularising their services. Indian Hotels has also launched their own app “Qmin” offering food delivery from their restaurants and kitchens, which have INR1,000 as the ordering threshold.

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DotPe – Direct delivery

Source: Company Discovery and variety – A key challenge for customers On the consumer experience side, we note consumers are likely to go to the restaurant portal to order only if they are aware of the direct ordering facility, are sufficiently incentivised, and the experience is as good as ordering on a food delivery platform. To incentivise, restaurants offer no delivery fee apart from other discounts. Since the address and payment details are stored by SaaS platforms, despite their web-based interface, user experience is reasonably smooth.

While direct-to-consumer has numerous advantages for restaurants, the main challenge continues to be pertaining to discovery. These companies have also realized this problem and have consequently tied up with popular payment platforms such as GPay, PhonePe and Paytm. Using these apps, customers can search for restaurants and order directly via these apps without the hassle of searching them individually.

Although this adds discoverability, but the experience is not as sophisticated as on food delivery platforms as there are no options to sort the restaurants according to various parameters, there is no visibility on how much time restaurant will take for delivery, rating of the restaurants, etc. Considering payment apps are not sufficiently integrated with restaurants’ and third party logistics providers, we do not expect discovery platforms to become as sophisticated as food delivery platforms, and thus the experience offer is likely to be sub-par.

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Direct food ordering is available on platforms like Google Pay, Phonepe and Paytm

Source: Company Consumer experience, outside discovery, is seamless Technology integration for direct delivery works in such a way that SaaS platforms can on-board restaurants in a matter of days by creating digital menus, integrating the billing system and offering third-party delivery platforms on-the-go. For high- ticket size, third-party delivery platform costs work out lower than those charged by delivery platforms. Since SaaS platforms work this through an Application Programing Interface (API), consumer get a fairly seamless experience with a WhatsApp or SMS update on food dispatch with a link to track delivery personnel in real time. Direct delivery – Impact varies for players We believe different segments of restaurants face their own set of challenges – resource availability and dependence on food delivery platforms is different – due to which their possibility and success in adoption of direct ordering will be different. Hence, we are evaluating the opportunities and success possibilities for each segment separately. We are broadly classifying restaurants into three categories: i) large QSR chains and cloud kitchens; ii) large chain restaurants; and iii) standalone restaurants and eateries. Large QSR chains and cloud kitchens Large and popular QSR chains such as McDonald’s, Domino’s and KFC as well as large cloud kitchens such as Rebel Foods (which owns brands such as Faasos, Behrouz Biryani and Oven Story), Poncho Hospitality (which owns Box8 and Mojo Pizza), typically have their own apps for food delivery. These companies also possess enough financial, marketing and logistics muscle to provide full-stack services. Furthermore, they can drive discovery through digital marketing branding campaigns. However, customers are unlikely to download many QSR or cloud kitchen apps; hence food delivery platforms will continue to drive the bulk of delivery business.

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We note that success of direct delivery has been mixed for different companies. Domino’s has been particularly successful with ‘30 minutes delivery’ attracting customers’ craving at breakneck speed. Other QSR chains and cloud kitchens are relatively less successful due to their inability to match this speed and other factors. However, with food aggregators gaining prominence, most of these companies have been unable to match the ease of use provided by aggregators. User experience for food aggregators has been far superior to those provided by these apps. We believe that this section of restaurants will be able to get 20–30% food delivery on their own platforms. The proportion of direct ordering will be a function of strength of the brand and their execution capabilities. McDonald’s, Domino’s and Faasos food delivery

Source: Companies

Popular chain restaurants Popular chain restaurants are characterised by high patronage, repeat customers and relatively high AOV. They typically rely on dine-in patrons for revenue, but the pandemic changed this dynamic. Since the take rate for aggregators is high, these restaurants have faced a major brunt, having to pay a significant amount to the likes of Zomato and Swiggy. Discovery is not a major issue for these restaurants as they are anyway well-known.

Consequently, these restaurants have been at the forefront of the direct delivery campaign. While these restaurants do have a certain connect with customers, their ability to drive these customers to direct delivery portal, by discounting, by marketing will determine their success. We note that chain restaurants will have to invest sufficient marketing resources to drive traffic to their own portal.

Some of SaaS based ordering platforms suggest high adoption by restaurants –DotPe claiming 150k partner restaurants and Tribe suggests another 15k. However, we believe that some of these on-boarding would be for features other than delivery and only a handful of restaurants would promote their own delivery. In terms of cost, Tribe indicated 3% of the GMV as platforms fees and third-part delivery may

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charge ~INR100 for delivery. Hence, assuming a 10% marketing cost and a 10% discount, own platform breaks even at an order value of INR1,000. This is significantly higher than Zomato, whose AOV would be lower than INR400. Hence, we believe that only a handful restaurants would opt for standalone delivery platforms and it would drive 15–20% of their delivery volumes.

Breakeven analysis: Own platform vis-a-vis Zomato/ Swiggy

(INR) Own Platform Zomato/ Swiggy AOV 1000 1000 Platform Fees/ Commission 3% 30% Platform Fees per order 30 300 Delivery Charges 70 Marketing Costs 100 Discount 100 Total Costs 300 300 Source: Edelweiss Research

Standalone restaurants For small standalone restaurants, while implementing order management platform is relatively easy, diverting orders to their own platforms will be challenging. We believe that restaurateurs will find it challenging to attract consumers to their platforms. Hence, we believe that this segment is unlikely to see any traction with direct ordering. Consequently, they will continue to remain dependent on food aggregators for both discovery and delivery. We believe that most restaurants are not adequately equipped for driving the marketing campaigns for online ordering platforms. From consumers’ side, while the ordering experience is seamless, discovery will be a challenge. We believe that consumers are likely to order from standalone platforms only in case they are aware exactly what they are looking to order and are adequately informed about the benefits thereof. Standalone restaurants will require significant marketing support, which smaller restaurants will not be able to manage. Hence, we believe adoption of the standalone platform will be limited to premium restaurants or larger chains that can afford enough.

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Large addressable market

 Food delivery platforms have made online food discovery and ordering experience very convenient. This is fuelling growth of online food delivery platforms across the globe.

 Indian food delivery market at ~INR300bn (USD4.2bn) is only a fraction of the INR4.2tn (USD67bn) out-of-home food eating out market. Restaurants in India are highly fragmented with chain restaurants accounting for only 6.2% of the value; standalone restaurants account for the rest of the pie.

 Low penetration of online food delivery ordering in India offers a mouth- watering opportunity.

 Non-home cooked food or restaurant food is only ~10% of the overall USD670bn food consumption market in India (54% in United States and 58% in China). Changing consumer behaviour, reduced dependence on home-cooked food and increasing disposable income are further expanding the addressable market.

Indian food delivery market: Long growth runway Online food delivery platforms are at nascent stage in India with an industry size of meagre USD4.2bn (USD21bn in US, USD90bn in China). It is, however, growing rapidly. Food delivery grew at an eye-opening 147% CAGR over FY18–20. However, with pandemic impacting the business, the industry had to swallow a 41% decline in FY21. Even so, growth is phenomenal and driven by increasing adoption of food delivery platforms, rising ordering frequency, and an expanding proportion of restaurant food consumption versus home food. Food Services defined as non-home cooked food or restaurant food currently contributes only approximately 10% to the overall USD670bn food market. This is starkly lower than global economies such as the United States and China with respective figures of 54% and 58% (of the total food consumption). According to RedSeer, the total addressable food services market opportunity of USD65bn (INR4.6tn) would growing at 9% per annum to USD110bn (INR7.7tn) in 2025. It particularly notes highly under-penetrated restaurant food-eating behaviour today. While Food Services in India is highly under-penetrated, it is likely to grow steadily, eating into home-cooked food much like the trend in the past. Growth will be driven by changing consumer behaviour, reduced dependence of millennials on home-cooked food/kitchen set-up, increasing consumer disposable income, and higher adoption among smaller cities.

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Indian markets nascent; comparative snapshot of India, US and China

Source: Zomato DRHP

India has only 45–55mn online food delivery We believe adoption of food delivery platforms will be a function of user education, users compared with 740mn mobile availability and ease of payment options, and reach of platforms. Since India has only broadband subscribers 45–55mn online food delivery users compared with 740mn mobile broadband connections, penetration of online food delivery platforms has a long runway for growth in the country. Ease of usage driving adoption Online food delivery apps have fundamentally altered the food ordering experience. Restaurant food ordering, pre-food delivery apps era, was cumbersome: i) restaurant discovery was challenging as consumers had to have the restaurant contact number and should have been aware of the menu for ordering food, which limited the choice; ii) restaurant food delivery was subject to in-house fleet and thus limited to a much smaller geography; iii) payment option was mostly restricted to cash; and iv) there was no way to track food delivery progress. Online food delivery platforms have solved all of these problems. These platforms aggregate multiple restaurant menus with all the relevant details, including pricing, and reviews, making ordering a seamless experience. They also provide a delivery fleet to restaurants, thereby significantly widening their catchment area. In most cases, consumers get real-time updates on the progress of their order, such as whether the food has left the restaurant and contact details of the delivery person. And there is a customer friendly helpdesk to check in case something goes wrong.

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Zomato – Ease of usage

Source: Company

We believe higher food tech platform usage can increase India’s eating out frequency, which is much lower than comparable global peers. Even a comparison of Zomato’s GOV by cohorts points to increasing frequency or usage/eating out.

Currently Zomato completes close to 30–35mn deliveries every month. Swiggy, which operates on a similar scale, also does roughly the same number of deliveries. For perspective, Meiutan, the largest food delivery company in the world, makes 850mn deliveries in a single month (65% market share). The largest company in the US fulfils close to 70mn orders a month (55% market share).

While we do expect the user base to grow significantly, it would be incorrect to assume the orders at similar levels of these countries without taking into account the difference in demographics of the aforesaid countries. India has a much larger population and relatively low penetration, but it is unlikely to scale up to the levels of other countries, considering India’s huge rural population. Nevertheless, we expect Zomato’s total orders to grow strongly north of 30% for the next four–five years to about 130mn orders a month.

Globally, the online food delivery industry has grown rapidly over the last few years. The Chinese market has been at the forefront clocking a 40% CAGR over 2015–20 to RMB664.4bn largely driven by increased penetration as more consumers moved online en masse. Developed markets of Europe have also grown at a brisk pace over the last few years. OC&C (Strategy Consultants) reckons a 19% CAGR for the online home delivery segment from 2017–19.

The pandemic has also significantly catalysed online deliveries. In South Asia, GMV of food delivery surged by 183% in FY20 to USD11.9bn. As highlighted earlier, this rapid growth has been driven by increased penetration and higher number of transactions per user.

In the past year, both Zomato and Swiggy have outgrown all major global companies (except DoorDash) as more users have logged onto food aggregators. However, on an absolute basis, the GMV of both Zomato and Swiggy remains well below these global companies.

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Comparison of food delivery companies’ GOV and GOV growth

80 250

64 200

48 150 (%)

(USD bn) (USD 32 100

16 50

0 0

JET

Zomato

Meituan

Grubhub

Doordash

GrabFood Delivery Hero Delivery

GOV % Growth

Source: Company, Edelweiss Research

GMV for both Zomato and Swiggy has soared over the last few years. Zomato’s GMV more than doubled from USD0.7bn to USD1.5bn over FY19 to FY20. Swiggy has also seen equally strong performance over the last couple of years with order growth of 320% and 145% in FY19 and FY20, respectively.

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QSRs: Beneficiaries with a caveat

 Zomato’s public filings throws up some interesting trends from the restaurant/QSR perspective. We deduce: i) JFL’s recovery has been similar to Zomato’s GOV, corroborating the strength of its delivery-based model. ii) Fall in active competition is not as intense as believed initially. iii) Platforms are a long- term enabler for the sector. iv) Take rates in the industry remain high, even in context of a global comparison.

 We also evaluate profitability of online channel versus dine-in —this remains a lower-margin channel and incremental business drives profit, but cannibalization impacts negatively.

 While JFL and Zomato are fundamentally different business models, we compare the two on certain key parameters.

JFL’s recovery has been in sync with Zomato; other have lagged A comparison of Zomato’s GOV and sales of the three major Indian QSRs shows that JFL managed to report recovery similar to Zomato on the back of its delivery excellence. While recovery for burger QSRs has been higher than the industry, it has lagged Zomato’s given the higher dine-in share. Sales recovery comparison

125

100

75

50

25

0 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21

Zomato (GOV) JFL WDL BKI FS Industry

Source: Zomato DRHP, Company, Edelweiss Research Note: For Zomato, considered its GOV, for JFL, WDL and BKI considered their reported sales.

Industry competition is nearly back to pre-covid levels

Our business is built around the core idea In its report on the restaurant industry in August 2020 (Link), Zomato mentions that that, over time, people in India are going out it expects ~40% of restaurants to shut down. While this was based on a survey by to eat at restaurants more than they cook at the company (~15,000 restaurants), looking at the bounce back in restaurants on its home.” platform points to majority of the network bouncing back.

Zomato DRHP

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Active food delivery restaurants

150000 1,43,089 1,32,769

120000 94,286

90000 (#) 60000 33,192 30000

0 FY18 FY19 FY20 9MFY21

Source: Zomato DRHP

Zomato’s customer evolution points to expanding eating frequency Overall though, online partnerships have been a boon for restaurants as they have helped increase overall top line by ~30% via a larger consumer base. With improved kitchen utilisation, online partnerships have also enabled restaurants to improve their bottom lines, considering the bulk of their costs are fixed (with only 25% of restaurant costs being food related, i.e. variable).

75% of restaurants costs are non-food/ fixed Ordering online drives a sharp improvement

EBIT Margin, 5 D&A, 5 Food, 25 Post-Online 70 20 10 30 Other costs, 20

Pre-Online 70 20 10 Marketing, 5 Labour, 25 Rent, 15 0 50 100 150 Dine in Phone based Take away Online ordering

Source: Prosus, Edelweiss Research Source: Company, Edelweiss Research

Online aggregators also influence consumption behaviour and lead to a significant increase in ordering.

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Evolution of customer using apps

Source: RedSeer Consulting

We believe higher food tech platform usage, can increase India’s eating out frequency, which is much lower than comparable global peers. Even a comparison of Zomato’s GOV by cohort shows increased frequency or usage/eating out.

GOV retention by cohort

Source: Zomato DRHP

Per capita spend on food services

Country CY15 CY20 USA 1,735 2,239 China 659 684 Saudi 665 769 Brazil 634 707 South 170 282 Indonesia 219 253 Turkey 124 181 India 94 122 Source: Burger Kind India DRHP, Edelweiss Research

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Take rates/commissions: Limited scope to increase Zomato follows a varied commission structure based on restaurant’s presence. While non-chain restaurants pay a much higher commission, outlets that are part of a chain, shell out lower. At present, commission rates vary anywhere between 18– 40% of the order value. The amount depends on parameters such as the size of the order and restaurant type. Companies such as JFL, which only use the app for origination (and not delivery), only pay commission.

One of the key concerns in the industry has been the potential to further increase take rates of food platforms, which will dent restaurants’ margins. However, a comparison of Zomato’s historical take rate trends and its comparison with global peers, not to mention Amazon’s potential entry in this segment (pilot on in Bangalore), indicates the current levels are more or less the ceiling for take rates/commissions.

Estimated commission rates

30 24-26 24

18

14-16 (%) 12 6-8 6

0 Only Listing/Self Delivery Large Chains Non Chain Restaurants

Source: Edelweiss Research

One of the key concerns in the industry has been the potential to further increase take rates of food platforms, which will dent restaurants’ margins. The focus on commission/take rates has increased recently, especially in the backdrop of higher sales from these platforms, post covid.

As highlighted above, Zomato’s take rates are among the highest globally and imply limited scope for further expansion. Also, while pick-up in the Direct Delivery model remains a debate, it will definitely be an added factor in keeping any further addition in take rates under check Foodtech platforms: An incremental business driver, but still lower margin FoodTech delivery players have been able to provide value to partner restaurants. Even after factoring in platform commissions (~20%), the incremental business drives up restaurant profitability. However, business generated from food tech players is naturally lower margin. If any outlet is generating incremental business, then food tech is a profitable channel, but substitution of the same customer online dents margins (refer to Exhibit 34).

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Realization comparison between dine-in and platform delivery

INR Dine in Price 300 Average online mark-up (%) 10% Price Listed online 330 Packaging charges 30 Total Received by Restaurant 360

Aggregator commission (%) 20% Commission 66

Cost of Packaging (assumed 70%) 21

Net restaurant realization – platform delivery 273 Source: Edelweiss Research Note: Restaurants generally keep online prices higher to compensate for delivery charges and platform commissions. Packaging charges based on a ballpark average of restaurants on various platforms.

Margin comparison

INR Normalized Gross Margin (%) 65% Normalized Gross Margin (INR) - A 195

Online Mark-up 30 Add: Packaging (net) 9 Less: Commission 66 Net cost of platform delivery (INR) - B 27

Incremental margin - Delivery (A-B) 168 Incremental margin - Delivery (%) 56% Source: Edelweiss Research. Note: Commission expenses are recorded as part of other expenses for QSR companies

JFL and Zomato: Best-in-class QSR, but not a flywheel

JFL has by far been the best-performing QSR in India, reflecting in its reach, store count, profitability, and on nearly every parameter. Even when it comes to own app penetration, JFL has been the most active among peers. It is now trying to drive that to the next level of engagement through customer data usage and analytics.

While JFL’s app penetration and delivery are one of the core tenets of its business model, it is fundamentally different from Zomato. For JFL the app is an enabler to its existing store network, whereas Zomato’s business model is centred on its app/website, which is an important channel for various restaurants. Zomato’s network effect spawns via on-boarding more customers and restaurants, which creates a loop. Also, what gives Zomato longer-term scalability is a potential uptrend in customer spends (see cohort data), which is spread across meals and restaurants.

In JFL’s case in both the abovementioned cases, there is singularity towards Domino’s brands (see exhibit below). That said, the two have common ground: i) control over delivery experience; and ii) usage of customer data to drive growth.

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Zomato's model has crossed scalability

Source: Edelweiss Research

JFL vis-a-vis Zomato

JFL Zomato Financials - FY20 (INR bn) GOV 39 112 Revenues 39 26 EBITDA 9 (23) PAT 3 (23) FCFF 5 (22)

Operational Parameters Rider strength - Mar'20 (#) ~12,000 1,61,637 Restaurants- Dec'20 (#) 1,314 1,32,769 App Downloads - Current (mn) 57 100+ Cities - Dec'20 (#) 285 526

Valuation Mcap (INR bn) 422 581 Mcap/ GMV (x) 10.9 5.2 Mcap/ Revenues (x) 10.9 22.3 Source: Company, Edelweiss Research. Note: Revenues for Zomato are the GOV * Commission rate Market cap for Zomato based on expected value as mentioned in the report.

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Business Model

 Zomato helps consumers order food online by connecting them with restaurants via its ordering platform and on-tap delivery fleet.

 Zomato’s other revenue sources include loyalty program, advertising revenue from restaurants and wholesale consumable supplies to restaurants.  We expect commissions on online food delivery to remain the biggest revenue stream for Zomato.

Commission from food ordering largest source of revenue The Zomato platform connects customers, restaurant partners and delivery partners, serving their multiple needs. Customers use the platform to search and discover restaurants, read and write customer reviews, and view and upload photos, order food, book a table and make payments while dining-out at restaurants. Zomato has two core B2C offerings: food delivery and dining-out along with its B2B offering called Hyperpure. Additionally, it runs customer loyalty program Zomato Pro, which includes both the dining out and food delivery segments. The Zomato business model has undergone a stark change since its inception in 2008. While it derived more than 80% of revenue from listing and advertisements in its inception years, it collects most revenues from delivery of food currently.

The company generates revenues from the following: online food delivery transactions, advertisements, subscriptions, sale of traded goods and other platform services. Primary expenses for the business include: i) advertisement and sales promotion; ii) outsourced support cost; iii) employee benefit expenses; and iv) purchase of traded goods.

Advertisement and sales promotion includes: i) platform-funded discounts; ii) marketing and branding costs; iii) customer appeasement costs; and iv) refunds to restaurants. Outsourced costs include delivery fees that Zomato pays partners along with an availability fee and support such as payments made to call centres.

Revenue components Expenses split-up in FY20

30000 Traded Employee Other, 11.6 Goods, 2.2 Benefit, 16.3 25000 2063 1076 20000

15000 163 565 149 (INRmn) 22908 1244 10000

12814 Sales & 5000 11204 Outsourced Advertising, 4660 Support 27.3 0 Costs, 42.6 FY18 FY19 FY20 9MFY21

Services Sale of traded goods Provision of platform services

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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Zomato earns commission income on completed food delivery transactions from restaurant partners. Till October 2019, Zomato recognized delivery charges collected from customers as revenue and netted discounts given to customers from revenue on a transaction-by-transaction basis. From October 2019 onwards, amount of delivery costs paid to its delivery agents consists of customer delivery charges that it collects from customers and is not recognized as a revenue or cost in its financials. Advertisement revenue is derived from sale of online advertisements, including promoted restaurants. Some of these advertising contracts also mandate a minimum number of clicks, which need to be completed before payment is made. Subscription revenues are typically recognized over the payment period. Apart from its core food delivery business, Zomato operates in the Hyperpure segment where it provides fruit and vegetables, groceries, dairy, gourmet and packaged foods, poultry, packaging and kitchen consumables, beverages and bar, meats and seafood, bakery and kitchen consumables to restaurants. The Hyperpure business was started in August 2018 and aims to become a single point of contact for multiple products replacing the need for multiple vendors. Revenue drivers For the food delivery business, revenue drivers include the number of transacting users, ordering frequency, AOV, take rates charged to restaurants and the number of restaurants that the company ties up with. For the dining out segment, drivers include the number of monthly active users and the number of restaurants that tie up with Zomato for availing this service. The Hyperpure business also depends on the number of restaurants that Zomato partners with, along with order frequency and the value of orders.

Commission revenue for Zomato

Source: Edelweiss Research Cost drivers Delivery costs and discount and marketing expenses constitute the bulk of expenses in the food delivery segment. For the dining out and Zomato Pro and segment, sales and marketing are the major costs involved while the cost of goods forms the largest costs for the Hyperpure segment.

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Revenue and cost drivers

Source: Company Moving parts of unit economics We note that Zomato’s unit economics have multiple moving parts, such as take rates, delivery charges, discounts and delivery charges. This makes its business model quite resilient as it can tweak these parameters to drive profitability. We note that if AOV decline leads to lower commissions, it may charge higher delivery charges to make up for consequent losses. The long-term growth strategy continues to focus on optimizing the business’s unit economics. One of the key metrics that the company uses to measure unit economics is the contribution profit per delivery. The contribution profit/ (loss) can be measured as

Contribution Profit = Commission and other charges + Customer delivery charges – delivery cost – discounts – Other variable costs wherein:  commissions and other charges include commissions from restaurants, advertisement and other revenue;  customer delivery charges include the delivery fee paid by customers; and  delivery cost includes customer delivery charge and availability fee. Other variable costs include payment gateway charges, support cost, restaurant partner refunds and other variable spends pertaining to activities such as delivery partner on-boarding, delivery partner insurance, SMS, cash on delivery handling and call masking.

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Illustrative economics of food delivery

Source: Company

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Financial Outlook

 We estimate 44.7% revenue CAGR for Zomato over FY21–25 on the back of 44.8% CAGR in ordering volume and flat growth in AOV.

 We reckon profitability per order would peak at INR33, up from INR22.9 in 9MFY21, as discounts slide and consumers pay more for delivery charges.

 We expect the company to turn cash flow and PAT positive FY23 onwards.

Higher penetration and increased frequency to drive revenue growth Zomato turned in a stellar revenue CAGR of 136.4% from FY18–20 driven largely by increased monthly transaction users, which soared about 12x. The pandemic certainly caused a blip in growth momentum. However, the business has bounced back strongly as less strict lockdowns have benefited food aggregators. Going ahead, we estimate a 44.7% revenue CAGR over FY21–25 driven by higher penetration and a higher proportion of transacting users coupled with increased ordering frequency. We estimate AOV to decline slightly as compared to 9MFY21 levels as single customer orders increase. Revenues from advertisements and Hyperpure are also likely to remain strong for the next few years as the company expands operations. Strong revenue growth to sustain

100 200

82 150

64 100 (%)

(INRbn) 46 50

28 -

10 (50) FY19 FY20 FY21E FY22E FY23E FY24E FY25E

Revenue YoY Growth

Source: Company, Edelweiss Research ‘Digital India’ to drive Internet users; penetration to increase Among the three business segments, we expect the food delivery segment to be the fastest growing. The government’s focus on ‘Digital India’ and a rising middle class are likely to ensure higher internet users in the country.

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Internet users in India

1100 1,000 980 950 900 850 860 800

750.2 (mn) 740 667.7

620 544.4

500 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26

Source: Edelweiss Research

Furthermore, increasing awareness and ease of use is expected to drive higher monthly average users and, consequently, higher monthly transacting users.

MAU and MTU trend

100 40

80 36

60 32

(%) (mn) 40 28

20 24

0 20 FY20 FY21 FY22 FY23 FY24 FY25 FY26

MAU MTU Proportion of transacting users

Source: Company, Edelweiss Research

We also expect an uptick in the number of orders per transacting user. We estimate the number of orders per transacting user would increase from 3.1 in FY20 to 3.8 in FY26, slightly slower than growth in earlier years as markets become more mature.

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Monthly order per transacting user

4 3.8 3.7 3.7 3.6 3.5 3.4 3.3 3.1 3.1 3.1

2.8

2.5 FY20 FY21E FY22E FY23E FY24E FY25E FY26E

Source: Company, Edelweiss Research

Both higher monthly transacting users and higher ordering frequency are likely to lead to drive up total orders. We estimate annual orders would more than triple from 403mn in FY20 to 1,422mn in FY26. Despite the strong growth, total orders are still well lesser than 10,147mn transactions that Meituan completed in 2020.

Coupled with minor growth in AOV and rapid growth in the total number of orders over the next few years, we expect Gross Order Value to grow by ~27% over FY20– 30. Number of orders and Gross Order Value

1600 600

1280 480

960 360 (mn)

640 240 (INRbn)

320 120

0 - FY20 FY21E FY22E FY23E FY24E FY25E FY26E

Number of Orders Gross Order Value

Source: Company, Edelweiss Research

Going ahead, we expect the take rate to remain around current levels. Take rates charged by Zomato are among the highest in the world, leaving little scope for upside going ahead. Restaurants’ high dependence on food delivery companies is also likely to ensure that take rates do not decline from these levels. Entry from newer players such as Amazon, which are charging comparatively low take rates can force incumbents to lower their takes rates, posing a key risk. Focus on unit economics to drive profitability We believe the company’s focus on maintaining positive unit economics will drive its profitability. After braving negative unit economics since its inception, Zomato

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managed to showcase positive unit economics in Q1FY21 itself, largely aided by higher AOV and lower discounts.

Unit economics in FY20 Unit economics in 9MFY21

Source: Company Source: Company

While AOVs are unlikely to rise further hereon (slight decline possible in near term), discounts are unlikely to return as more people are used to these food ordering apps and expansion to newer cities will be not be sizeable. Discounts generally tend to be on the higher side as the company offers attractive incentives to customers in newer cities.

Going ahead, we expect unit economics over the next few years to largely mirror that of FY21. Commission charges might correct slightly due to a decline in AOV in the near term as the unlocking post-pandemic would result is smaller sized orders.

Contribution profit/(loss)

FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Average Order Value 278.4 381.5 360.0 370.8 381.9 393.4 401.2 405.2 409.3 413.4 417.5 Take Rate 15.7 15.9 15.9 15.9 15.9 15.9 15.9 15.9 15.9 15.9 15.9

Commission and other charges 43.6 60.5 57.1 58.8 60.6 62.4 63.6 64.3 64.9 65.6 66.2 Customer delivery charges 15.3 27.0 28.4 29.8 29.8 29.8 29.8 29.8 29.8 29.8 29.8 Delivery cost (52.0) (45.0) (44.1) (43.7) (43.2) (43.7) (44.1) (44.5) (45.0) (45.4) (45.9) Discount (21.7) (7.0) (5.0) (3.0) (2.9) (2.7) (2.6) (2.4) (2.3) (2.2) (2.1) Other variable costs (15.7) (14.8) (14.8) (14.8) (14.8) (14.8) (14.8) (14.8) (14.8) (14.8) (14.8) Contribution profit loss (30.5) 20.7 21.5 27.1 29.5 31.0 31.9 32.3 32.6 32.9 33.2 Source: Company, Edelweiss Research

We expect contribution margin as % of GOV to increase to 8% in FY26 from -11% in FY20 and then stabilise around those levels going ahead.

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Contribution as % of GOV

10 7.3 7.7 7.9 8.0 5.4 6.0 5

0 (%) -5

-10 (11.0) -15 FY20 FY21E FY22E FY23E FY24E FY25E FY26E

Source: Company, Edelweiss Research

The industry had seen a sharp dip in AOV at the start of 2019 due to the introduction of flat-priced meals and affordable single-serve meals. It grew steadily for the next few quarters. After a sharp increase in AOV for FY21 due to the pandemic, we estimate a slightly moderation for AOV for FY22 as more people returning to office will result in smaller orders. Over the long term, we expect a gradual increase in AOVs, largely driven by an increase for premium restaurants.

Drop in AOV in Q1CY19

Source: Redseer

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Average order value trend

410 393 382 382 371 378 360

346 (INR) 314

278 282

250 FY20 FY21 FY22 FY23 FY24 FY25

Source: Company, Edelweiss Research Sales and marketing costs to edge down The last few years have seen sales and marketing costs remain elevated as Zomato expanded into newer cities and spent heavily on becoming the preferred application for food ordering. Going ahead, while we do see these costs increasing as both Zomato and Swiggy continue to jostle for the top spot, they are likely to grow at a slower pace as expansion into newer cities slows and profitability becomes a top priority.

Sales and marketing costs as % of total revenue

60

50

40 (%) 30

20

10 FY18 FY19 FY20 FY21E FY22E FY23E FY24E FY25E

Source: Company, Edelweiss Research

With both discounts and S&M costs coming down, we do see an improvement in margins going ahead. Over the next six–seven years, we expect EBITDA margin for Zomato stabilising around 25–27%.

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EBITDA margin to stabilise going ahead

50

18

-14 (%) -46

-78

-110

FY20

FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E

Source: Company, Edelweiss Research On path to profitability from FY23 Without major requirement of capital expenditure, we expect Zomato to convert majority of its EBITDA to free cash flow. We expect Zomato to turn profitable on an EBITDA and FCF level in FY23. Given the nature of the business, depreciation and finance costs are also smaller, resulting in profitability as early as FY23. We expect earnings to expand at a CAGR of 65% from FY23–30.

EBITDA and FCF

39

24.1 26 19.5 14.2 13 12.0 6.2 5.9 0.11.2

(INRbn) 0

(5.9) (4.9) (2.7) -13 (8.6)

-26 (23.0)(22.1) FY20 FY21E FY22E FY23E FY24E FY25E FY26E EBITDA FCF

Source: Company, Edelweiss Research

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Valuation

 Zomato’s global peers are trading at CY22 price to sales of 2–12x, depending on market growth and maturity, and their strength in respective markets.

 The pandemic has made food delivery platforms all the more relevant for consumers and restaurants alike, leading to a spurt in their valuations.  Our two-stage DCF yields a valuation for Zomato of INR581bn (USD8.1bn), which implies an FY23E price to sales of 12x.

 Any change in AOV, unit economics and ordering frequency are the biggest valuation vectors; if AOV goes back to INR280, the DCF value would fall to INR294bn (USD4.1bn). With a further uptick in AOV to INR450, valuation increases to INR904bn (USD12.6bn)

Global peers’ valuations depend on growth profile and market share Meituan, the world’s largest online food delivery company, trades at a 1-year forward P/S of 7.9x. DoorDash, which has defied competition over the last year and emerged as the clear leader in US markets, trades at a 1-year forward valuation of 11.6x. We note Meituan reported 17.7% growth in CY20 while DoorDash grew by 226.1%. Just Eats and Grubhub trade at 3.1x and 2.4x 1-year forward price to sales. All players have different market positions and growth rates, and that is driving the difference in their valuations. On an EV/EBITDA basis, Meituan is trading at 149.7x CY22 while Doordash and Just Eat Takeaway trade at 119.6x and 180.7x CY22 respectively. We note that most of these platforms are currently loss-making and hence valuations are unarguably high if we take their earnings into consideration. Peer comparison table

2020-2024 CAGR P/S P/E P/B EV/Revenue EV/EBTIDA Market Cap Revenue EBITDA TTM 1 Year- Fwd 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023 Meituan 2,41,878 40.0 92.3 11.1 7.9 454.0 79.5 14.2 14.5 12.2 8.4 6.1 4.6 149.7 47.8 Doordash 50,221 28.6 62.0 11.6 5004.0 146.3 10.8 10.4 9.2 10.8 8.9 6.9 227.3 119.6 55.7 Delivery Hero 33,483 60.3 NA 9.2 18.1 48.0 540.0 5.1 3.5 2.5 Just Eat Takeaway 13,619 28.8 NA 5.2 3.1 80.0 1.3 1.3 1.3 2.6 2.1 1.8 180.7 27.9 Grubhub 5,699 17.0 NA 2.82 2.4 656.5 48.0 4.5 4.0 2.6 2.3 2.0 73.1 32.9 14.7 Zomato 7,969 44.7 NA 27.5 17.6 644.5 105.3 12.2 12.0 10.7 16.1 11.0 7.8 (107.4) 5704.2 85.6 Source: Bloomberg, Edelweiss Research. For Zomato, FY22 corresponds to 2021 and so on. Valuations of food delivery platforms have soared The pandemic has increased the relevance of food delivery platforms for consumers and restaurants alike. The last couple of years have also seen a surge in stock prices of global food delivery companies. The upsurge has been evident from the first quarter of 2020 as investors realized the rapid growth in demand for food delivery. DoorDash’s price surged more than 80% of its listing price in December 2020 before cooling off over subsequent months. Meituan has seen its stock price grow 7x over the last 2.5 years. However, most of these stock prices fall 10–20% in the last three months after opening up of the lockdown as people have ventured out.

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Stock prices of food delivery companies (rebased to 100)

1000

800

600

400

200

0 Jan-19 May-19 Sep-19 Jan-20 May-20 Sep-20 Jan-21 May-21

Meituan Delivery Hero Just Eat Takeaway Doordash Grubhub

Source: Bloomberg, Edelweiss Research Valuing Zomato at INR581bn (USD8.1bn) We value Zomato based on a DCF-based model, pegging its valuation at USD8.1bn. After displaying positive unit economics for this year, Zomato would turn positive on the EBITDA and PAT levels in FY23 in our view. We have assumed WACC of 12% (risk free rate of 6%, EPR of 6%) along with terminal growth of 4%. Our valuation implies 12x FY23E price to sales. DCF valuation – FCF Estimates

FY19 FY20 FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Revenue 13126 26047 21099 33041 48432 68130 92533 120906 151170 182402 217275 255858 YoY Growth 98.4 (19.0) 56.6 46.6 40.7 35.8 30.7 25.0 20.7 19.1 17.8 EBITDA (22,435) (23,047) (8,630) (4,941) 93 6,202 14,151 24,078 34,880 46,341 59,108 72,990 YoY Growth 2.7 -62.6 -42.7 NA 6564.0 128.2 70.1 44.9 32.9 27.5 23.5 EBIT (22,866) (23,889) (9,280) (5,648) (678) 5,359 13,228 23,073 33,781 45,135 57,778 71,517 Tax rate 0 0 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 EBIT (1-t) (22,866) (23,889) (6,942) (4,225) (507) 4,009 9,894 17,258 25,268 33,761 43,218 53,494 WC changes 1,879 131 (279) 98 108 160 173 156 152 137 155 187 Capex 349 809 651 716 799 889 993 1,112 1,248 1,406 1,586 1,794 Depreciation 431 842 651 707 771 843 923 1,005 1,099 1,206 1,330 1,473 FCF (20,206) (22,107) (5,920) (2,703) 1,171 5,900 11,983 19,531 27,767 36,509 46,289 56,949 Source: Edelweiss Research

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DCF valuation

Parameters Terminal growth rate 4% Growth rate in the second stage (FY31-38) 10% Dis FCF till FY22-38 (INR mn) 2,71,999 Terminal value (INR mn) 15,86,973 PV of terminal value (INR mn) 2,58,870 Enterprise value (INR mn) 5,30,869 Net debt (INR mn) (49,662) Equity value (INR mn) 5,80,531 Equity value (USD mn) 8,063 Source: Edelweiss Research Valuation and unit economics highly sensitive to changes in AOV In FY21, Zomato managed positive unit economics due to a surge in AOV and reduced discounts. However, assuming all other parameters at the same level, if AOV were to fall below pre-pandemic levels, a marginal decline in take rate would result in negative unit economics.

Sensitivity analysis – Contribution profit/ (loss)

Take Rate 10% 12% 14% 16% 18% 20% 22% 230 (16.7) (12.1) (7.5) (2.9) 1.7 6.3 10.9 280 (11.7) (6.1) (0.5) 5.1 10.7 16.3 21.9 330 (6.7) (0.1( 6.5 13.1 19.7 26.3 32.9 AOV 380 (1.7) 5.9 13.5 21.1 28.7 36.3 43.9 430 3.3 11.9 20.5 29.1 37.7 46.3 54.9 480 8.3 17.9 27.5 37.1 46.7 56.3 65.9 530 13.3 23.9 34.5 45.1 55.7 66.3 76.9 Source: Edelweiss Research

Our overall valuation is highly sensitive to changes in AOV. A mere INR10 increase in AOV can lift Zomato’s overall valuation by 6%. While we do not expect AOV to return to pre-covid levels, even if it declines by half of the increase during the pandemic, valuation can plunge by almost 25%.

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Valuation sensitivity to change in AOV

16 14.0

12.8 11.9 9.9

9.6 7.9

(USD bn) (USD 5.9 6.4 3.9

3.2 1.8

0 260 300 340 380 420 460 500

(AOV) Source: Edelweiss Research Superior execution versus Swiggy crucial for sustaining valuations We believe Zomato’s valuation largely hinges on its ability to sustain – and eventually fortify – its leadership position in the Indian food delivery market. As network effect disproportionally benefits the largest platform, it is imperative for players to target the pole position. While Zomato claims leadership in food delivery in India, Swiggy is not far behind and is growing at a faster pace. Swiggy and Zomato are practically of the same size currently, hence execution in terms of cohort growth and getting new consumers would be key to watch out for. We don’t see capital as a constraint for both the companies in the medium term and hence their execution will be a function of the quality of management and their strategic choices. Comparison of key metrics – Zomato and Swiggy

Swiggy Zomato Valuation USD 4.9bn USD 5.4bn Number of Restaurants >1,60,000 3,50,174 Delivery Partners 2,40,000 1,61,637 Cities 523 526 Source: Company, Edelweiss Research. Swiggy metrics for FY20. Zomato for Q3FY21. Valuation as per last raised round

For FY20, Swiggy reported 125% GMV growth while Zomato’s GMV growth was a tad lower at 108% (refer to exhibit 64). Swiggy’s order growth was 145% for FY20 while Zomato’s lagged at 111%. In terms of size too, both players are almost similar. In the last funding round (Apr-21), Swiggy was valued at USD4.9bn while Zomato’s valuation in the latest funding round (Feb-21) was USD5.4bn. Swiggy has also raised almost USD1bn in the last couple of years; considering its burn rate, the company has sufficient capital to take on Zomato. Swiggy is backed by deep-pocketed private equity investors such as SoftBank and Prosus, which have experience investing in such ventures globally and can advise and arum management with insights that matter.

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Order growth comparison GMV growth comparison

600% 350% 524% 304% 500% 300% 265% 400% 250% 320% 300% 200%

200% 150% 145% 125% 111% 108% 100% 100% FY19 FY20 FY19 FY20

Swiggy Zomato Swiggy Zomato

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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Key risks

Superior execution to Swiggy crucial for sustaining valuations We believe Zomato’s valuation largely hinges on its ability to sustain – and fortify – leadership in India. As network effect disproportionally benefits the largest platform, it is imperative to target pole position. While Zomato claims the leadership in the food delivery space in India, Swiggy is not far behind and is growing faster.

Swiggy and Zomato are practically of the same size currently; hence their execution in terms of cohort growth and getting new consumers would be key. We don’t see capital as a constraint for both the companies in the medium term. Execution, therefore, will be a function of quality of management and their strategic choices. Higher-than-anticipated fall in AOV One of the key reasons for Zomato’s positive unit economics in FY21 is its higher AOV driving greater commissions. The spurt in AOV was driven by: i) a higher proportion of family orders than individual orders by young professionals, students, etc.; ii) premium restaurants, which were solely for dine-in patrons, were forced to list on food delivery platforms in the wake of the pandemic; and iii) customer preference for premium restaurants, which tend to have higher hygiene standards. We do expect AOV to trend down as the economy opens up further and more individuals start ordering (as opposed to families). However, a sharper-than- anticipated fall in AOV will have a direct bearing on the commission pool and profitability, which would impact the company’s valuation. Increased competition nibbling away at unit economics We note that local clustering and high take rates mean this business will remain prone to entry by new players in smaller market and take away market share. Amazon is already looking to foray in select markets and may dole out a lower take rate to attract restaurants. This may lead to higher competition, putting pressure on take rates, which may impact unit economics. Zomato may have to dish out more discounts to customers to ensure that consumers do not switch to other platforms, which may impact unit economics and consequently valuations. Delivery and other cost escalations Delivery cost is a key component. Zomato depends on its delivery partners for last- mile food delivery. Since these partners work as contractors, Zomato does not have to bear their social security costs etc. But since delivery partners are price takers, governments are considering regulations to ensure higher payments to delivery partners. This may lead to cost escalation for Zomato and lower its profitability. Regulations As these platforms command the terms of the agreement, many restaurant bodies are lobbying with the government to cap take rates. Governments across the world are evaluating the market power of such platforms from restaurants as well as delivery partners’ perspectives. Any unfavourable regulations such as higher fees for delivery partners or a cap on the take rate will erode valuations of these companies. Success of direct delivery While we see little scope of success for direct delivery, if QSR chains/popular restaurants rack up orders on their own platforms, it can meaningfully alter unit economics since higher value and more profitable orders would shift away.

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Global peer set

Delivery Hero Delivery Hero was founded in 2011 by Mr. Niklas Ostberg in Sweden and currently operates in close to 50 countries and four geographic regions: Asia, Europe, MENA and Americas. In 2020, Delivery Hero completed 1,304mn orders all over with a Gross Merchandise Value (GMV) of EUR12.4bn. Higher orders driving growth; AOV growth weak Over the last few years, both GMV and total orders have grown multifold as the company spent aggressively to acquire customers, and penetration has increased. Besides, newer cohorts are exhibiting a higher rate of returns and more recent cohorts are ordering more frequently as visible above. Strong revenue growth over the last few years has clearly been driven by these factors, and cohort models are being increasingly used for revenue planning purposes.

GMV by region Total orders by region

14,000 1,400

11,200 1,120

8,400 840

5,600 560

2,800 280

- 0 FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20

Asia MENA Europe Americas Asia MENA Europe Americas

Source: Company, Edelweiss Research Source: Company, Edelweiss Research Cohort analysis

Source: Company

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While GMV and number of orders have shown strong growth, Average order value has trended downwards as the company expanded into smaller cities where order sizes are lower.

Average order value by region

18

15.6

13.2

(EUR ) (EUR 10.8

8.4

6 FY15 FY16 FY17 FY18 FY19 FY20

Asia MENA Europe Americas Total

Source: Company

The company generates a major portion of revenue from online marketplace services, for which it receives a certain commission based on the order value. This percentage of commission varies by country, type of restaurant and services provided, and marketing support. It also generates revenue through delivery fees and non-commission based revenue such as premium placements.

Revenue by segment

Credit Card Use, 3% Other, 4% Prime Placings, 4% Integrated Verticals, 7%

Commissions, Delivery Fees, 58% 23%

Source: Company, Edelweiss Research

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Consolidated statement of profit and loss

(EUR mn) FY15 FY16 FY17 FY18 FY19 FY20 Revenue 166 297 454 665 1,238 2,472 YoY Growth 78.7 52.8 46.6 86.1 99.7 Gross Profit 137 213 280 347 311 494 Gross Margin 82.4 71.6 61.7 52.2 25.1 20.0 Marketing Expenses 201 223 258 314 495 632 Other Operating Expenses 135 150 256 275 464 756 Operating Profit (199) (160) (234) (242) (648) (894) Operating Profit Margin (120) (54) (52) (36) (52) (36) Earnings before taxes (247) (202) (325) (259) (663) (1,388) Net Loss from Operations (244) (191) (332) (277) (690) (1,403) Source: Company, Edelweiss Research

Growth over profitability; inorganic key part of strategy

Continued investments made by Delivery Hero, particularly in lesser mature markets, have seen losses surge over the last few years. Moreover, the company’s operations in highly competitive markets has kept profitability under pressure. Delivery Hero has taken some steps to improve in this regards by exiting its operations in Canada, along with launching joint ventures in Colombia. Its recent acquisition of Woowa Brothers in the highly competitive Korean market is also a step in the same direction. However, re-entry into markets such as Germany is likely to keep investments elevated.

Since its inception, Delivery Hero has made 23 acquisitions. Its largest acquisition includes Woowa Bros in Korea. In 2019, Delivery Hero agreed to buy Woowa Brothers, which operates the Beamin app. However, the combined entity would have a 97% market share. As a result, regulators agreed to the deal only if Delivery Hero would sell its entire stake in Delivery Hero Korea Food delivery app (Yogiyo) within six months of the receipt of the confirmation. Some of the other acquisitions include InstaShop (August 2020), Honest Food Company (December 2019), FoodPanda (December 2016), Foodonclick (May 2015) and Yemek Sepeti (May 2015).

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DoorDash DoorDash is the largest food delivery company in the US with a market share of roughly 56%. In 2020, it fulfilled 816mn orders with a marketplace GOV of USD24,664mn. The last year has been a watershed moment for DooDash with both total orders and marketplace GOV growing more than 3x. It has also managed to race ahead of competition over the last couple of years by focusing on execution. The previous five quarters have been record-breaking in terms of both number of orders and marketplace GOV. Strong growth resulting in clear leadership

Superior execution, coupled with rapid Improved customer retention has also helped drive average order frequency to all- expansion helped DoorDash emerge as the time high levels. Its subscription offerings too have proved to be quite successful. clear winner in the US food delivery market Furthermore, cohort GOVs are growing fast over time and newer cohorts are growing faster, driving higher GOVs. Contribution profit across cohorts have also turned profitable from year two onwards.

Marketplace GOV Total orders

30000 900 816 24664 24000 720

18000 540 (mn) (USD mn) (USD 12000 360 8039 263

6000 180 2812 83

0 0 FY18 FY19 FY20 FY18 FY19 FY20

Source: Company, Edelweiss Research Source: Company, Edelweiss Research Marketplace GOV by cohort Contribution profit as % of marketplace GOV

Source: Company Source: Company

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Smaller cities expansion aiding growth but AOV under pressure DoorDash’s strategy of focusing on less dense cities has also paid rich dividends as lower competition has allowed it to gain a strong foothold in these cities. Tier-wise revenue contribution

Others, 6% Tier 4, 11%

Tier 1, 36% Tier 3, 8%

Tier 2, 39%

Source: Company, Edelweiss Research

While AOV has declined in the last couple of years as it has expended to lower tier cities, it continues to be the highest among food delivery companies in the US. However, DoorDash’s AOV remained flat in 2020 despite the pandemic. Interestingly, DoorDash’s take rates remains among the lowest in the world even after having crept up over the last few years.

Average order value Take rate

35 12% 33.9 11.7%

33.6 12%

11.0% 32.2 11%

(USD) 30.6 30.8 30.2 11% 10.3%

29.4 10%

28 10% FY18 FY19 FY20 FY18 FY19 FY20

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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Consolidated statement of profit and loss

(USD mn) 2018 2019 2020 Revenue 291 885 2,886 Gross Profit 63 362 1518 Gross Margin 22 41 53 Sales and Marketing 135.0 594.0 957.0 Other Operating Expenses 138 384 997 Operating Income (210) (616) (436) Operating Margin (72) (70) (15) Earnings Before Tax (204) (666) (458) Net Loss (204) (667) (461) Source: Company, Edelweiss Research

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Internet

Meituan Meituan is the world’s largest online delivery company by revenue. It has a market share in excess of 65% in the world’s largest food delivery market. Meituan had started off as a group-buying website, which offered deals to customers and gradually expanded to other services such as selling movie tickets and into food delivery. In 2015, Meiutan merged with its primary rival Dianping while retaining their individual brands. Growth across parameters

Meituan has seen growth across parameters over the years: number of users, ordering frequency, AOV and monetisation rate. In the last year only, the company handled close to 850mn orders per month and had a gross transaction volume of RMB4889bn. Meituan has emerged as the clear leader in the fast-growing food delivery industry, characterised by higher spending and changing consumption habits. The company operates in three categories: food delivery, in-store, hotel & travel, and net initiatives and others.

Over the last few years, the company’s focus has been on driving higher number of orders, which is visible in the 74% CAGR over the last five years. Consequently, Gross Transaction Volume, which is the value of products and services on the platform, has surged at a CAGR of almost 100% over the last five years. This strong growth has been also aided by higher average transaction per user, which has grown almost 3x over last five years, and AOV, which has almost doubled.

Gross transaction volume of food delivery Number of orders

600 12000 10147.4 488.9 480 9600 8722.1 392.7

360 7200 6393.4

282.8 (mn)

(RMB bn) (RMB 240 4800 4089.7 171.1

1585 120 58.7 2400 15.6 637 0 0 FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

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Average transactions per user Cohort Analysis- – Number of transactions

30 27.4 28.1

25 23.8

20 18.8

15 12.9 10.4 10

5 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, Edelweiss Research Source: Company

While Average Order Value for Meituan has been rising, it continues to be well below its developed country counterparts and even emerging market peers. In our view, this is attributable to the company’s strategy of aggressively expanding into smaller cities. Similarly, while monetization (take) rate has been ratcheted up, it continues to be well below the world average. We believe that both these factors still have plenty of improvement, which can aid further growth.

Average order value Monetisation rate

50 46.9 16% 14.0% 13.6% 44 44.8 13.5% 12.3% 44 42 13%

37 38 10% 9.0%

32 6%

26 24 3% 1.1%

20 0% FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20

Source: Company, Edelweiss Research Source: Company, Edelweiss Research

Diversified across businesses

Apart from the core food delivery services that contribute close to 60% of overall revenue, Meituan also has the: i) In-store, hotel and travel; and ii) New initiatives and Others segments. The in-store, hotel and travel segment allows merchants to sell vouchers, coupons, tickets, and reservations on the platform. The New Initiatives and Others segment includes revenue derived from cloud-based enterprise resource planning systems, integrated payment services, supply chain solutions to merchants, small and medium-sized merchants’ financing services, local transportation services, and other products and services.

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Revenue by segment

New Initiatives and Others, 24%

Food Delivery, 58% In-Store, Hotel and Travel, 19%

Source: Company, Edelweiss Research

Consolidated statement of profit and loss

(RMB mn) FY15 FY16 FY17 FY18 FY19 FY20 Revenue 4,019 12,988 33,928 65,227 97,529 1,14,795 YoY Growth 223.2 161.2 92.3 49.5 17.7 Gross Profit 2,779 5,941 12,220 15,105 32,320 34,050 Gross Margin 69.2 45.7 36.0 23.2 33.1 29.7 Selling and Marketing Expenses 7,141 8,337 10,909 15,872 18,819 20,883 Other Operating Expenses 4,112 3,860 5,137 10,319 10,821 8,837 Operating Profit (8,474) (6,255) (3,826) (11,086) 2,680 4,330 Operating Margin (211) (48) (11) (17) 3 4 Earnings Before Taxes (9,243) (10,631) (18,934) (1,15,491) 2,762 4,438 Profit After Tax (10,519) (5,795) (18,988) (1,15,493) 2,236 4,708 Source: Company, Edelweiss Research

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GrabFood GrabFood is a super app, which had launched food delivery services in 2018. Apart from food delivery, it offers mobility, express (e-commerce), digital advertising and financial services. It is the largest food delivery platform in South Asia despite being in existence for only three years and operates in eight countries: Singapore, Indonesia, Malaysia, Thailand, Myanmar, Cambodia, the Philippines and Vietnam. GrabFood had a GMV of USD5.5bn, growing at a 203% CAGR from 2018–20. It targets to break even at EBITDA level in H2CY21. Higher penetration driving growth Low penetration in the food delivery segment has allowed companies to invest aggressively to acquire customers. Unlike China and the US, which have already reached penetration levels above 20%, countries in South East Asia are currently close to half of those levels. Hence, the opportunity size remains huge. Online food delivery penetration

25 21 21 20

15

11 (%) 10

5

0 SE Asia China USA

Source: Company

Like several other countries, the onset of the pandemic has resulted in sharp growth for GrabFood as well. The pandemic has also allowed GrabFood to reduce its losses as it was able to reduce discounts to a great degree.

GrabFood – Financials

Deliveries 2018 2019 2020 2021E 2022E 2023E

GMV (USD bn) 0.6 2.9 5.5 7.5 10.6 14.7

Adj. net revenue (USD bn) 0.0 0.2 0.8 1.1 1.6 2.2 Adj. net revenue as % of GMV 6% 8% 15% 15% 15% 15%

Segment EBITDA (USD bn) (0.2) (0.8) (0.3) (0.0) 0.1 0.3 Segment EBITDA as % of Adj. net -478% -347% -34% -2% 9% 15% revenue Source: Company

The GMV per user cohort also indicates that newer users continue to grow at a faster clip while older cohorts continue to spend heavily.

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GMV per user cohort

Source: Company

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Just Eat Takeaway Just Eat Takeaway was formed as result of the merger of UK-based meal delivery app Just Eat and its Dutch rival Takeaway in 2020. In 2016, Takeaway had sold its UK food delivery operation to Just Eat. The company now operates in 23 countries across Europe, North America, Australia and Israel with 60mn active consumers and a total addressable population of greater than 450mn. Overall penetration level stands at just 13%. Its major markets include the United Kingdom, Germany, Canada and the Netherlands, which contribute more than 90% to its GMV. The company also announced the purchase of US-based Grubhub last June for USD7.3bn, and has received all regulatory approvals thereof. This would help JET establish its footprint in USA.

Orders and GMV

Orders (mn) GMV (Euro mn) FY19 FY20 FY19 FY20 UK 133 179 2.8 4 Germany 69 112 1.5 2.5 Canada 48 86 1 1.7 Netherlands 38 49 0.8 1.2 ROW 125 162 2.5 3.5 Total 413 588 8.6 12.9 Source: Company, Edelweiss Research

Active consumers and average order value

Active Consumers (mn) Average Order Value (in Euro) FY19 FY20 FY19 FY20 UK 13 16 21.4 22.3 Germany 10 12 20.9 22.7 Canada 5 6 20.2 20.4 Netherlands 4 5 21.4 23.5 ROW 16 21 19.8 21.6 Total 48 60 20.7 22.0 Source: Company, Edelweiss Research

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Swiggy Swiggy started off in 2014 and has gradually built up its in-house delivery fleet while expending into different cities. From only 100 cities at the start of 2019, the company’s operations have expanded to more than 500 cities and headcount to more than 2,18,000. Expanding into related categories Apart from its core food delivery services, Swiggy has launched ancillary services by utilising its exhaustive logistics network. In 2018, it launched several new initiatives to complement its core services and improve stickiness- Swiggy Super, which offered free deliveries to all subscribers, Swiggy Stores, general product delivery service (shut down), Swiggy Go, which the instant pick-up and drop service to deliver packages across the city (later rebranded as Swiggy Genie) and Swiggy Daily, which provides home cook food delivery at affordable prices (shut down in 2020).

In 2019 and 2020, Swiggy took three new initiatives, which garnered good traction during the pandemic. Apart from Swiggy Go, which was rebranded as Swiggy Genie, it launched InstaMart (replacing Swiggy Stores), which operates via the dark stores mode. Dark stores typically resemble conventional supermarkets, except that they are open to online orders only. Swiggy also introduced Health Hub, wherein it provides healthy food options. For this, Swiggy has partnered nutritionists and restaurants to prepare curated menus for special menus

Swiggy Genie Swiggy Health Hub

Source: Company Source: Company Cloud Kitchen: A potential game changer, albeit fraught with risks

Earlier in 2017, Swiggy had also launched its Cloud Kitchen program and had made significant progress in this business till 2019 as it made investments over INR1.75bn with over 100 cloud kitchens. It continued on its expansion spree and had planned to spend another INR0.75bn over the next few years until the pandemic hit, which

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dislocated the business. Consequently the company laid off as many as 1,100 cloud kitchen staff.

Costs for establishing and operating cloud The cloud kitchen business is inherently advantageous on many counts. For starters, kitchens are much lower; however, such the overall cost of setting up a cloud kitchen is much lower than that for setting up cloud kitchens operated by food aggregators a restaurant. Similarly, the cost of operating a cloud kitchen is significantly lesser directly compete with restaurants creating a than restaurants, whereof rents account for a major part of the budget. conflict of interest Cloud kitchens can also operate more than one brand from the same kitchen, allowing for batch preparation and reduction of costs at the overall level. Costs can also be reduced significantly as they do not require investments in several expensive items. Flexibility and nimbleness provides the added advantage. Cloud kitchens are also easily more scalable, not requiring investment in expensive real estate. The focus is entirely on food preparation rather than providing user experience, or focusing on wait times etc. Consequently, cloud kitchens can offer highly competitive prices to customers.

On the flip side, barriers to entry are lower for cloud kitchens and hence they attract higher competition. Furthermore, there is dependence on food aggregators for business. In case of Swiggy, they have access to user information, which can be exploited. Standalone cloud kitchens, however, do not have access to user data, which implies access to limited feedback/data. For Swiggy, the whole concept of a cloud kitchen also creates a conflict with its own restaurant partners, which are vying for the same set of customers. Most of Swiggy’s acquisitions have been aimed at shoring up its logistics network and upgrading its technology. Clearly, the acquisitions as well as new initiatives that Swiggy has undertaken seem to suggest that any expansion even in adjacent areas looks to exploit its strong logistics network that it has developed over the years.

Swiggy – A chronology of acquisitions

Date Company Comments Dec-17 48East Gorumet Asian food start-up Aug-18 SuprDaily Milk delivery start-up Mumbai-based demand on delivery company. Integrated with Swiggy in Aug-18 Scootsy June 2020 Two-member AI based start-up which applies deep learning and Feb-19 Kint computer vision to identify objects in videos Source: Company, Edelweiss Research

Swiggy is currently valued at USD4.9bn after its last round of funding, slightly below its primary rival, Zomato. There has been heavy interest among investors with its latest fund-raising being heavily oversubscribed. The latest fund-raising also provides Swiggy with ammunition at a time when demand for food delivery remains elevated.

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Swiggy – Investment timeline

Date Amount Raised (USD mn) Valuation (USD bn) Investors Apr-15 2 Accel Partners, SAIF Partners Accel Partners, SAIF Partners, Jun-15 16.5 Northwest Ventures Accel Partners, Northwest Jan-16 35 Ventures, SAIF Partners, Harmony Partners, RB Investments Accel Partners, Northwest May-16 7 0.1 Ventures, DST Global Accel Partners, Northwest Sep-16 15 0.2 Ventures, Bessemer Venture Partners, SAIF Partners Accel Partners, Northwest Ventures, Bessemer Venture May-17 80 Partners, Harmony Partners, SAIF Partners, Naspers Feb-18 100 Naspers, Meiutan Dianping DST Global, Coatue Management, Jun-18 210 1.3 Naspers, Meiutan Dianping DST Global, Wellington Management, Tencent Holdings, Dec-18 1000 3.3 Naspers, Hillhouse Capital Group, Meiutan Dianping Wellington Management, Meituan Feb-20 113 3.6 Dianping, Prosus Samsung Ventures, Tencent Holdings, Korea Inestment Partners, Apr-20 43 Ark Impact, Mirae Asset Capital Markets Goldman Sachs, Accel, Falcon Edge Apr-21 800 5 Capital, Think Investments, Prosus, Amansa Capital, Carmignac Source: Company, Edelweiss Research

Like Zomato, Swiggy racked up losses till FY20 as it continued to be on expansion spree and offered attractive incentives to users.

Swiggy – A look at revenues vis-à-vis losses

40 37.7

32 27.8 23.63 24

(INRbn) 16 12.9

8 4.42 3.97

0 2018 2019 2020

Revenue Losses

Source: Company, Edelweiss Research

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Management Overview

Mr. Deepinder Goyal He is the founder, managing director and chief executive officer. Mr. Goyal is Master of Technology (Mathematics and Computing integrated) from the Indian Institute of Technology, Delhi. Prior to founding Zomato, he worked at Bain & Company. Mr. Gunjan Patidar He is a co-founder, and currently the chief technology officer. Mr. Patidar joined the company on January 19, 2010. He is a Bachelor of Technology (Textile Engineering) from the Indian Institute of Technology, Delhi. Ms. Akriti Chopra She heads people development. Mr. Chopra joined the company on November 9, 2011. She is Bachelor of Commerce from Lady Sri Ram College, University of Delhi, and is an associate member of the Institute of Chartered Accountants of India. Prior to joining the company, Ms. Chopra was associated with PricewaterhouseCoopers through its network firm Lovelock & Lewes, Chartered Accountants for three years. Ms. Surobhi Das She heads customer experience at Zomato. Ms. Das’s first stint was from July 5, 2011 to May 12, 2018. She re-joined Zomato on August 18, 2020. Ms. Das is a Bachelor of Architecture from the School of Planning and Architecture, New Delhi, and earned a post-graduate diploma in management from the Indian Institute of Management, Ahmedabad. Prior to joining Zomato, she worked with Bain & Company India Private Limited. Ms. Daminee Sawhney Ms. Sawhney heads human resources. She first joined the company on February 1, 2011 and was associated till November 11, 2011. Ms. Sawhney re-joined the company on December 24, 2012. She is a Bachelor’s of Business Administration from the Amity University and a Master’s of Science (International Employment Relations and Human Resource Management) from the London School of Economics and Political Science, United Kingdom. Prior to joining Zomato, she worked at Radisson MBD Hotel. Mr. Gaurav Gupta He is a co-founder and currently heads supply at Zomato. Mr. Gupta joined the company on June 22, 2015. He is a Bachelor of Technology (Chemical Engineering) from the Indian Institute of Technology, Delhi, and holds a Post-graduate Diploma in Computer-aided Management from the Indian Institute of Management, Calcutta. Prior to Zomato, Mr. Gupta worked at A.T. Kearney Limited for over ten years. Mr. Akshant Goyal He is the chief financial officer. Mr. Goyal joined Zomato on April 1, 2017. He is a Bachelor of Engineering (Computer Science) from the University of Delhi and holds a Post-graduate Diploma in Management from the Indian Institute of Management, Bangalore. Prior to joining Zomato, he worked in different roles at Kotak Mahindra Capital Company Limited and a fin-tech start up. Mr. Rahul Ganjoo He heads food delivery. Mr. Ganjoo joined Zomato on August 21, 2017. He is a Bachelor of Engineering (Computer Science) from University of Pune and a Master of Science (software engineering) from the Birla Institute of Technology & Science,

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Pilani, Rajasthan. Prior to joining Zomato, he worked for over 16 years in different roles with Wipro Limited, ThoughtWorks Inc., Symantec Corporation, SAY Media (formerly SixApart), Twitter Inc., and Jasper Infotech Private Limited (Snapdeal). Mr. Mohit Gupta He is a co-founder and head new businesses at Zomato. Mr. Gupta joined Zomato on July 1, 2018. He is a Bachelor of Engineering (Mechanical) from Sardar Patel University, Gujarat and holds a Post-graduate Diploma in Management from the Indian Institute of Management, Calcutta. Prior to joining Zomato, Mr. Gupta worked for over 19 years in different roles at Pepsi Foods Private Limited and MakeMyTrip (India) Private Limited. Ms. Sandhya Sethia She is the Company Secretary and the Compliance Officer. Ms. Sethia joined Zomato on January 10, 2019 and was appointed Company Secretary on January 21, 2019. She is a Bachelor of Commerce (Honours) from the University of Delhi and an Associate Member of the Institute of Company Secretaries of India. Prior to joining Zomato, Mr. Sethia worked for over six years in different roles at JHS Svendgaard Laboratories Limited, Mideast Integrated Steels Limited and Affle India Private Limited. Ms. Damini Bhalla She is the General Counsel at Zomato and joined Zomato on March 26, 2021. Ms. Bhalla graduated with a B.A. B.L. (Honours) degree from NALSAR University of Law in 2005, Hyderabad and is a qualified, non-practising solicitor of England and Wales. Prior to joining Zomato, she worked at two law firms, including one abroad. She was a partner at L&L Partners, New Delhi (formerly known as Luthra & Luthra Law Offices) in her last stint.

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Financial Statements

Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 26,047 21,099 33,041 48,432 Share capital 0.3 0.3 0.3 0.3 Gross profit 24,958 19,554 30,806 45,309 Reserves 7097 50,017 47,411 48,496 Employee costs 7,989 8,388 8,926 11,273 Shareholders funds 7098 50,018 47,411 48,496 Other expenses 40,016 19,795 26,819 33,942 Minority interest (65) (249) (434) (618) EBITDA (23,047) (8,630) (4,941) 93 Borrowings 15 15 15 15 Depreciation 842 651 707 771 Trade payables 2,687 1,960 2,501 3,180 Less: Interest expense 126 1 1 1 Other liabs & prov 19,269 19,269 19,269 19,269 Add: Other income 1,380 2,711 1,918 1,883 Total liabilities 29,004 71,012 68,762 70,342 Profit before tax (23,856) (6,570) (3,731) 1,204 Net block 364 364 364 364 Prov for tax 0 (1,656) (940) 303 Intangible assets 15,549 15,552 15,560 15,589 Less: Other adj 0 0 0 0 Capital WIP 2 2 2 2 Reported profit (23,856) (4,915) (2,791) 901 Total fixed assets 15,915 15,918 15,927 15.955 Less: Excp.item (net) 0 0 0 0 Non current inv 0 0 0 0 Adjusted profit (23,856) (4,915) (2,791) 901 Cash/cash equivalent 3,599 46,052 43.350 44,330 Diluted shares o/s 0.7 0.7 0.7 0.7 Sundry debtors 1,231 784 1,227 1,798 Adjusted diluted EPS (34,121) (6,818) (3,757) 1,564 Loans & advances 0 0 0 0 DPS (INR) 0 0 0 0 Other assets 8,259 8,259 8,259 8,259 Tax rate (%) 0 25.2 25.2 25.2 Total assets 29,004 71,012 68,762

Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Other exp (% of rev) 153.6 93.8 81.2 70.1 Reported profit (23,856) (4.915) (2,791) 910 Employee Cost (% of rev) 30.7 39.8 27.0 23.3 Add: Depreciation 842 651 707 771 Gross margin (%) 95.8 92.7 93.2 93.5 Interest (net of tax) 126 1 1 1 EBITDA margin (%) (88.5) (40.9) (15.0) 0.2 Others 1,721 (1,285) 194 396 Net profit margin (%) (91.6) (23.3) (8.4) 1.9 Less: Changes in WC 131 (279) 98 108 Revenue growth (% YoY) 98.4 (19.0) 46.6 40.7 Operating cash flow (21,298) (5,629) (1,987) 1,970 EBITDA growth (% YoY) 2.7 (62.6) (42.7) NA Less: Capex 809 651 716 799 Adj. profit growth (%) 136.1 (79.4) (43.2) NA Free cash flow (22,107) (5,920) (2,703) 1,171

Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.0 (8.0) 9.5 7.0 RoE (%) (163.1) (19.0) (6.1) 2.0 Repo rate (%) 4.4 4.0 4.0 4.3 RoCE (%) (149.4) (24.4) (8.0) 2.6 USD/INR (average) 70.9 74.2 73.0 72.0 Inventory days 0 0 0 0 Average Order Value 278 381 360 371 Receivable days 13.5 13.5 13.5 13.5 GMV (INR mn) 112,209 94,864 143,747 215,956 Payable days 23.9 23.9 23.9 23.9 Total Orders (mn) 403 249 399 582 Working cap (% sales) 5.3 7.9 4.8 3.0 Outsourced staff cost 20,938 9,044 12,668 16.543 Gross debt/equity (x) 0 0 0 0 S&M cost 13,384 6,380 7,949 9,086 Net debt/equity (x) (0.8) (1.0) (1.0) (1.0) MTU 10.7 6.6 10 14.0 Interest coverage (x) (182.9) (8,630) (4,941) 93

Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) (24.3) (118.2) (208.0) 644.5 EPS growth (%) 136.1 (79.4) (43.2) NA Price/BV (x) 82.0 11.6 12.2 12.0 RoE (%) 24.3 (88.3) (67.9) NA EV/EBITDA (x) (23.0) (61.5) (107.4) 5704.2 EBITDA growth (%) 2.7 (62.6) (42.7) NA Dividend yield (%) 0 0 0 0 Payout ratio (%) 0 0 0 0

Source: Company and Edelweiss estimates

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