Profits Growing Beyond Expectations
IPO Note Zomato Ltd rd 13 July, 2021 Technology Platform/ Application
Summary of the Issue Highlights Issue highlights Zomato Limited (Zomato) was incorporated on January 18, 2010, as “DC Foodiebay Online Services Pvt. Ltd.” It is one of the leading Food Services Platforms in India in terms of the value of Issue size: Rs 9,350 Cr food sold, as of March 31, 2021, with 32.1 Mn average MAU visiting the platform in India during No. of shares in Cr: 130.20 – 123.3 shares FY21. As of March 31, 2021, the company has a presence in 525 Indian cities with 389,932 Active Face Value: Rs 1/- Restaurant Listings. Its mobile application is the most downloaded food and drinks application (iOS App Store and Google Play combined) in India in each of the last 3 fiscal years. Issue summary
Price band: Rs 72– Rs.76 Key highlights Bid Lot: 195 and in the multiples thereafter Strong network effects driven by unique content and transaction flywheels Issue opens: July 14th, 2021 The end-to-end Food Services approach makes Zomato the most unique Food Services platform Issue closes: July 16th, 2021 globally combining the offerings of platforms such as Yelp, DoorDash, and OpenTable in a single Lead Managers: Kotak Mahindra, Morgan Stanley mobile app. Restaurant listings on the platform include a host of data points called Structured India, BOFA Securities, Content such as photos of the menu and premises, address and GPS coordinates, phone Registrar: Link Intime India Pvt. Ltd. number, website, social media presence, cuisine, opening timings, average meal cost, free Shareholding (%) parking availability, seating, and Wi-Fi availability, and live entertainment, among others. Pre-Issue Post-Issue Widespread and efficient on-demand hyper-local delivery network Promoters 0% 0.00% Public 96% 96.43% Zomato operates one of India’s largest hyperlocal delivery networks. In FY21, its delivery partners No promoter & fulfilled 94.1% of the orders delivered. Food delivery is highly complex with food being a highly 4% 3.53% Non Public perishable commodity requiring careful handling while maintaining high levels of hygiene and real- Total 100.0% 100.0% time on-demand service. The company’s precise and real-time demand forecasting, fleet optimization, and intelligent dispatch technology enable it to optimize matching orders and Pre Post delivery partners using machine learning. This gives the company a competitive edge in the issue issue# market. No. of shares (in Cr) 666.09 791.09 EPS 5.8 4.9 Strong consumer brand recognized across the length and breadth of India # - Lower Price Band/ Upper Price Band Zomato enjoys a strong brand name and a brand recall across both large and small Indian cities. Its offerings include both food delivery and dining-out, enabling the company to capture the mind- Issue break-up share of consumers for ‘non-home cooked food’. Its brand has become synonymous with food. Its Shares % of Rs Category delivery partners carry Zomato branded gear including t-shirts, jackets, bags, and boxes, further (in cr ) issue In Cr QIB 97.16 75 6994 enhancing Zomato’s brand awareness on the streets. Non-Institutional 19.433 15 1399 Financial Summary Retail 12.955 10 933 Lower Price Band/ Upper Price Band (Rs Cr) FY19 FY20 FY21 Amount (Rs. Purpose Equity Share Capital 0.03 0.03 0.03 Cr) Repayment and prement of certain Reserves & Surplus 7,643 457 2,356 36.5 borrowings 8,096 2,083 2,597 Net Worth Acquisition and other strategic 83 initiatives
Purchase of office premices in 1993.26 2604.9 1312.69 65 Net Sales Mumbai EBITDA -467 -2,304 -2,231 General Corporate Purposes [.] -23% -88% -170% EBITDA Margin (%) Issue Details Net Profit -816.43 -2385.6 -1010.51 The Offer Amount No of Shares Net Profit Margin(%) -41% -92% -77% Fresh Issue Rs. 9000 Cr Upto 125 crs. NAV 15.09 4.77 6.92 OFS Source: RHP; Axis Securities Infoedge Rs. 375 Crs Upto 5.20 Crs
Omkar Tanksale Research Analyst Call: (022) 4267 1759, 9819327371 email: [email protected]
1
Objects of the issue
Objective
Objective Amount (Rs Cr)
Funding organic and inorganic growth initiatives 6,750
General and corporate purpose -
Total 6,750
Source: RHP
Business Overview Zomato Limited (Zomato) is one of the leading Food Services platforms in India in terms of the value of food sold with 32.1 Mn average MAU visiting the platform during FY21. As of March 31, 2021, it has a presence in 525 cities with 389,932 Active Restaurant Listings. Its mobile application is the most downloaded food and drinks application in India in each of the last 3 fiscal years (iOS App Store and Google Play combined). The company’s technology platform connects customers, restaurant partners, and delivery partners, serving their multiple needs. The platform provides services such as enabling customers to search and discover restaurants, read and write reviews, view and upload photos, order food delivery, book a table, and make payments while dining out at restaurants. On the other hand, it provides restaurant partners with industry-specific marketing tools which enable them to engage and acquire customers to grow their business while also getting a reliable and efficient last-mile delivery service. It also operates a one-stop procurement solution, Hyperpure, which supplies high-quality ingredients and kitchen products to restaurant partners. Zomato also provides delivery partners with transparent and flexible earning opportunities.
Zomato has a footprint across 23 countries outside India as of March 31, 2021. It has taken a conscious strategic call to focus only on the Indian market going forward. Given the large market opportunity in India, a focused Zomato will enhance the value for all its stakeholders.
Platform Offerings The company’s business is built around the core idea of the Indians eating restaurant food more than cooking at home over time. To capture value out of this customer behaviour shift, it has two core business-to-customer (B2C) offerings: • Food delivery and • Dining-out, • Hyperpure
Zomato Pro: Another important part of its business is Zomato Pro - a customer loyalty program, encompassing both food delivery and dining-out. B2C, as well as B2B offerings, help increase the value of the platform for customers enabling it to further attract new customers and to deepen engagement with existing customers. Each of the offerings also helps improve the Assortment, Affordability, Accessibility, and Quality (“AAAQ”) of restaurant food for customers thereby helping grow the restaurant industry.
Food delivery: Zomato has consistently gained market share over the last 4 years to become the category leader in the food delivery space in India in terms of Gross Order Value (“GOV”). The company generates a majority of its revenue from food delivery and the related commissions charged to the restaurant partners for using the platform as well as earns advertising income for marketing various restaurant partners.
For additional information & risk factors please refer to the Red Herring Prospectus 2
3 key stakeholders in the food delivery business Customers: Food delivery allows customers a convenient and on-demand solution to search and discover local restaurants, order food, and have it delivered reliably and quickly. On average, 6.8 Mn Indian customers have ordered food monthly on its platform in FY21 with an average monthly frequency of over 3 times. In FY21, 99.3% of its food delivery orders came through Zomato's mobile application. Delivery partners: Zomato has one of India’s largest hyperlocal delivery networks in terms of a number of delivery partners. As of Mar’21, it has 169,802 Active Delivery Partners and In FY21, its delivery partners fulfilled 94.1% of the Orders delivered. The company’s delivery network collected food from its restaurant partners and delivered it to customers with a median delivery time of less than 30 minutes (delivery time calculated from the time the order is placed on their mobile application to the time the order is delivered to the customer). Restaurant partners: Zomat has 148,384 Active Food Delivery Restaurants on the platform as of Mar’21.
Restaurant partner economics: Zomato charges pre-defined commissions to its restaurant partner and remits to the restaurant partner a net amount equal to the cost of food ordered and packaging charges less the commission and any restaurant-funded discounts. Separately, the restaurant partner may pay for any food delivery-related advertisement on the platform.
Delivery partner economics: Zomato remits 100% of the tips and delivery charges provided by the customer to the delivery partner (pass- through). Incrementally, it also pays the delivery partner an additional fee.
Zomato economics: Zomato retains the commission net of any Zomato funded discounts. Additionally, it also earns food delivery-related advertisement sales revenue from its restaurant partners.
Dining Out Customers use their dining-out offerings to search and discover restaurants, read and write customer-generated reviews and view and upload photos, book a table and make payments while dining out at restaurants. Zomato is a preferred destination for dining-out search and restaurant discovery in India.
As of March 31, 2021, Zomato has 389,932 Active Restaurant Listings on its platform and in FY21, 61.8 Mn units of CGC were generated on the platform compared to 157 Mn in FY20. In India, it is the largest food-focused restaurant listing and reviews platform in terms of a customer base as of March 31, 2021. It is also the largest online table reservations platform in India with 3.3 Mn covers booked through its platform in FY21. In FY20, 12.2 Mn Covers were booked through their platform. Zomato currently monetizes its dining-out offering through advertisement sales through which restaurant partners pay for enhanced visibility on its platform. In FY21 2,512 restaurant partners paid for its advertising sales product in India compared to 8,064 restaurant partners in Fiscal 2020. Zomato currently does not monetize table reservations or dining-out payments.
B2B Supplies Hyperpure is the farm-to-fork supplies offering for restaurants in India. It sources fresh, hygienic, quality ingredients and supplies directly from farmers, mills, producers, and processors to its restaurant partners, helping them make their supply chains more effective and predictable while improving the overall quality of the food being served. Restaurant partners ordering supplies through Hyperpure get a “Hyperpure Inside” tag on their Zomato page, which is intended to provide customers with assurance of the quality ingredients used at the restaurant. Zomato started Hyperpure in 2019 and is growing rapidly. In the month of March 2021, it supplied to over 9,225 restaurant partners across 6 cities in India. Hyperpure helps the company increase its engagement with restaurant partners, and in turn, retain and grow their loyalty with Zomato.
Zomato- Pro Zomato has an exclusive paid-membership program - Zomato Pro, which unlocks flat percentage customers discounts at select restaurant partners across both food delivery and dining-out offerings. These discounts are available to the customers on all days of a year (except during a few pre- determined festive days) and the Pro Restaurant Partners choose and fund the percentage discount available to Pro Members at their restaurants. The customers become Pro Members by paying Zomato a membership fee. The program allows Pro Restaurant Partners to market themselves to a select audience. As of March 31, 2021, Zomato had 1.5 Mn Pro Members and over 25,443 Pro Restaurant Partners in India.
For additional information & risk factors please refer to the Red Herring Prospectus 3
Competitive Strengths
Strong network effects driven by unique content and transaction flywheels The end-to-end Food Services approach makes Zomato the most unique Food Services platform globally combining the offerings of platforms such as Yelp, DoorDash, and OpenTable in a single mobile app. Restaurant listings on the platform include a host of data points called Structured Content such as photos of the menu and premises, address and GPS coordinates, phone number, website, social media presence, cuisine, opening timings, average meal cost, free parking availability, seating availability and Wi-Fi availability, live entertainment, a smoking room, and if the table booking is recommended, among others.
It collects and curates all Structured Content using a feet-on-street approach, aided by in-house developed technology facilitating cost efficiencies. Besides Structured Content, it also has CGC which consists of reviews, ratings, and photos posted by customers on the platform. Its focus on content attracts a large number of customers to the platform organically. During Fiscal 2021, 68% of new customers were acquired organically and not through any paid advertisements. Customers value the rich content of the restaurant listings on the platform and further enhance it by adding their own reviews and photos to the platform which leads to a virtuous cycle of more new customer acquisition.
This unique content strategy feeds into the transaction funnel and creates a strong flywheel effect as more content leads to more customers and more customers leads to richer content. More customers on the platform also increase the number of food orders for the restaurants on the platform leading to more restaurants listings in turn. More restaurants increase the choices available to the customers leading to further customer growth.
Widespread and efficient on-demand hyper-local delivery network Zomato operates one of India’s largest hyperlocal delivery networks. In Fiscal 2021, its delivery partners fulfilled 94.1% of the orders delivered. Food delivery is highly complex with food being a highly perishable commodity requiring careful handling while maintaining high levels of hygiene and real-time on-demand service. The company’s precise and real-time demand forecasting, fleet optimization, and intelligent dispatch technology optimize matching orders and delivery partners using machine learning. This gives the company a competitive edge in the market.
Technology and product-first approach to business Zomato is a technology-first organization, leveraging artificial intelligence, machine learning, and deep data science to continuously drive innovations on its platform for its community of customers, delivery partners, and restaurant partners. Its products are highly personalized, intuitive, simple to use, visually appealing, and are designed to drive high engagement with its customers. It enables restaurant partners with fully automated order management systems offering dashboards having features such as order transmission, order processing, menu synchronization, payment reconciliation, content promotion, marketing tools, and invoice management. Its delivery partners are able to accept orders, see per order earnings and estimate the time and navigate to restaurants’ location and point of delivery using their mobile application. Customers are also able to record and save voice instructions for the delivery partners to reach the point of delivery without intervention through voice calls or messages thus creating a seamless delivery experience. Their machine learning-driven algorithms are able to forecast demand, optimize fleet utilization, and batch orders. Zomato runs an integrated product, design, engineering, and data science team without boundaries to boost collaboration and speed of output.
Strong consumer brand recognized across the length and breadth of India Zomato has a strong brand name and recalls across large and small Indian cities. Its offerings include both food delivery and dining-out enabling the company to capture the mindshare of consumers for ‘non-home cooked food’. Its brand is synonymous with food and customers associate Zomato with everything to do with food. Its delivery partners also carry Zomato branded gear including t-shirts, jackets, bags, and boxes, further enhancing its brand awareness on the streets.
For additional information & risk factors please refer to the Red Herring Prospectus 4
Key Business Strategies
Sharp focus on unit economics and growth Zomato has made significant investments in marketing and promotions to accelerate customer adoption of food delivery in India. These investments have contributed towards category creation and resulted in customers coming back to its platform organically for repeat purchases. With an increasing share of repeat customers, its advertisement and sales promotion expenses per order have reduced over time.
Expand and strengthen the community across three verticles – Food delivery, Dining-out, and Hyperpure The company intends to attract new customers and convert them into active and frequent customers. It continues to focus on increasing engagement with its existing customer base to increase its frequency on the platform and plans to grow the Zomato Pro membership base further. To ensure the right selection and assortment for customers on the platform, it continues to invest in growing the breadth, depth, and quality of restaurant partners. It will continue to deepen the relationships with restaurant partners by innovating to increase the platform’s value proposition for restaurant partners, expanding the suite of services, and driving differentiated partnerships with restaurants. To provide a seamless delivery experience to its customers, it will continue to invest in delivery infrastructure and expand its delivery partner base, providing them with flexible earning opportunities.
Invest in new products and technologies Zomato will invest in new products, technologies, and features for the benefit of the customers. It is in the process of rolling out nutraceutical products on its platform. It continues to innovate to offer higher personalization and new experiences to its customers while continuing with its sharp focus on machine learning to achieve this objective.
Continue building a strong consumer brand The company’s campaigns, community, and content have created a strong consumer brand in India and it intends to continue investing in branding activities and increase brand awareness and brand affinity further. Furthermore, it strives towards increasing the benefits of the hyperlocal delivery network to its branding advantage.
For additional information & risk factors please refer to the Red Herring Prospectus 5
Key Risks Increasing operational expenses Zomato has a history of net losses and we anticipate expenses increasing moving forward. It has incurred loss for the year of Rs 1,011 Cr, Rs 23,86 Cr and RS 816.4 Cr in FY19, FY20 and FY21 respectively. The company expects costs to increase over time in areas such as advertising and sales promotion costs to attract customers and restaurant partners to platform, developing platform, including expanding platform’s offerings, developing or acquiring new platform features and services, expanding into new markets in India, and expanding delivery partner network. It may continue to generate losses given significant investments expected towards the growing business. These efforts may be more costly than expected and may not result in increased revenue or growth in the business. Any failure to increase revenue sufficiently to keep pace with investments and other expenses could prevent the company from achieving profitability or positive cash flow on a consistent basis. If the company is unable to successfully address these risks and challenges as encounter them, business, cash flows, financial condition and results of operations could be adversely affected.
Inability to sustain historical growth rates The Company may not be able to sustain historical growth rates and historical performance may not be indicative of future growth or financial results. Almost all aspects of business, in particular food delivery, have experienced rapid growth in recent year. To grow business, The company will need to work with existing and an increasingly large number of new restaurant partners, delivery partners and other participants in network efficiently and establish and maintain mutually beneficial relationships with them. .
Unfavorable media coverage Unfavorable media coverage could harm business, financial condition, cash flows and results of operations. Unfavorable publicity regarding business model, revenue model, customer support, technology, platform changes, platform quality, actions of delivery partners and restaurant partners, privacy or security practices, or management team could adversely affect reputation. In order to ensure that we cater in the best possible manner to all stakeholders, we are constantly reviewing systems and policies to reflect the dynamic nature of the market and customer needs. While we are open to roll back any policy if not well received, we may receive negative publicity or incur costs to implement and roll back any such policy which would have an adverse impact on the operations. Such negative publicity could also harm the size of network and the engagement and loyalty of restaurant partners, customers, delivery partners and other participants that utilize platform, which could adversely affect business, cash flows, financial condition, and results of operations.
Low entry barriers There are low barriers to entry in industry and the cost of switching between offerings is low which could have a material adverse impact on operations. Customers may have a propensity to shift to the lowest-cost provider and could use more than one platform, independent contractors who provide delivery services could use multiple platforms concurrently as they attempt to maximize earnings and restaurant partners could prefer to use the platform that offers the lowest commission rates and adopt more than one platform to maximize their volume of orders. As we and competitors introduce new offerings and as existing offerings evolve, we expect to become subject to additional competition. Competitors may adopt certain of platform features or may adopt innovations that restaurant partners, delivery partners or customers value more highly, which would render the company’s platform less attractive and reduce its ability to differentiate . Increased competition could result in, among other things, a reduction of the revenue we generate from the use of platform, the number of participants on platform, the frequency of use of platform, and margins.
For additional information & risk factors please refer to the Red Herring Prospectus 6
Board of Director
Kaushik Dutta is the Chairman and an Independent Director of the company. He is co-founder of Thought Arbitrage Research Institute,
an independent not-for-profit research think tank. He was also associated with Price Waterhouse & Co., Chartered Accountants LLP, and
Lovelock & Lewes, Chartered Accountants as a Partner for over 25 years.
Deepinder Goyal is the Founder and the Managing Director and Chief Executive Officer of the company. Prior to founding Zomato, he
worked with Bain and Company.
Sanjeev Bikhchandani is the Non-Executive Director of the company and a nominee of Info Edge on the Board. He is the founder and
an executive director on the board of directors of Info Edge.
Douglas Lehman Feagin is the Non-Executive Director of the company and a nominee of Alipay on the Board. Prior to joining the
company, he has worked as managing director in the investment banking division of Goldman Sachs Group, Inc., for approximately 22
years. He is currently associated with Alipay U.S., Inc. as senior vice president of the Ant group.
Aparna Popat Ved is the Independent Director of the company. She is a professional badminton player having represented India at
various international forums including the Commonwealth Games (where she also won a silver and three bronze medals) and the
Olympics in 2000 and 2004.
Gunjan Tilak Raj Soni is the Independent Director of the company. She is currently the chief executive officer of Zalora Group. She also
has extensive experience across various roles in Myntra Jabong India Pvt Ltd, Star India Pvt Ltd, and Mckinsey & Company, Inc.
Namita Gupta is the Independent Director of the company. She has previously worked with Facebook, Inc., and Microsoft for several
years. She is the founder and currently on the board of directors of Airveda Technologies Pvt Ltd.
Sutapa Banerjee is the Independent Director of the company. She also has extensive experience in the financial services industry
having worked at ABN AMRO Bank and Ambit Capital Pvt ltd for several years.
For additional information & risk factors please refer to the Red Herring Prospectus 7
Key management personnel
Gunjan Patidar is co-founder of the company and currently the chief technology officer. He joined the company on January 19, 2010.
Akriti Chopra is currently the head of people development at the company. She joined the company on November 9, 2011.
Surobhi Das is currently the head of the customer experience at the company. She first joined the company on July 5, 2011, and was
associated till May 12, 2018. She re-joined the company on August 18, 2020.
Daminee Sawhney is currently the head of human resources at the company. She first joined the company on February 1, 2011, and
was associated till November 11, 2011. She re-joined the company on December 24, 2012.
Gaurav Gupta is co-founder and currently the head of supply at the company. He joined the company on June 22, 2015.
Akshant Goyal is currently the Chief Financial Officer of the company. He joined the company on April 1, 2017.
Rahul Ganjoo is currently the head of food delivery at the company. He joined the company on August 21, 2017. Prior to joining the
company, he worked for over 16 years in different roles with different companies.
Mohit Gupta is co-founder and currently the head of new businesses at the company. He joined the company on July 1, 2018. He has
experience of over 19 years in different roles with different companies.
Sandhya Sethia is currently the Company Secretary and Compliance Officer of the company. She joined the company on January 10,
2019.
Damini Bhalla is currently the General Counsel at the company. She joined the company on March 26, 2021.
For additional information & risk factors please refer to the Red Herring Prospectus 8
Financials (Consolidated) Profit & Loss (Rs Cr)
Y/E March FY21 FY20 FY19 Net Sales 199 260 131 - - - Operating Expenses 0 0 0 Purchase of stock in trade 20.2826 11.0597 1.8719 Employee Expenses 74.07 79.88 60.07 Other Expenses 152.833 400.16 293.89 Total Operating Expenses 24710 49221 35649.61 EBITDA -24510.62 -48960.53 -35518.35 Margin -12293% -18797% -27060% Depreciation & Amortization 137.74 84.236 43.199 EBIT -2464.836 -4904.4766 -3556.1549 Margin -1236% -1883% -2709% Other Income 124.6 138 85.1 EBIT after Other Income -2340.236 -4766.4766 -3471.0549 Interest Expenses 10.08 12.636 8.649 Exceptional Items -324.7 -122 1199.9 Profit before tax -2675 -4901 -2280 Tax Expenses 186 252 127 Profit for the period -816 -2,386 -1,011
Source: Company, Axis Securities
For additional information & risk factors please refer to the Red Herring Prospectus 9
Balance Sheet (Rs Cr) Y/E March FY21 FY20 FY19 LIABILITIES Equity Capital 0.03 0.03 0.03 Reserves and Surplus 7,692 710 2,600 Non Controlling interest -6 -7 -31 Net Worth 8,093 703 2,568 - - - LT borrowings 53 1,434 76 Other LT Liabilities 14 17 14 LT Provisions 26 17 14 Capital Employed 8,186 2,171 2,672
ASSETS Tangible Assets 84 103 132 Intangible Assets 207 278 69 Goodwill 1,248 1,209 188 Intangible Assets under development 0 1 0 Non Current Investments 3,006 10 12 Other Fin. Assets 2 5 4 Total Non Current Assets 4,553 1,637 442 Current Assets - - - Inventories 15 4 2 Investments 2,205 324 2,137 Trade Recievables 130 123 70 Cash & Bank Bal. 307 167 212 Other Financial Assets 223 302 116 Total 4,151 1,263 2,972 Less: Current Liabilities and Provisions - - - ST Borrowings 1 - - Trade Payables 294 268 376 Other Current Financial libilities 75 253 133 ST Provisions 119 174 164 Total 5,177 7,208 7,061 Total Assets 8,186 2,171 2,672
Source: Company, Axis Securities
Cash Flow (Rs Cr)
Y/E March FY21 FY20 FY19 Pre-tax profit -815 -2,386 -1,011 Depreciation 14 8 4 Chg in working capital -1,036 -2,112 -1,743 Total tax paid 19 -32 -28 Cash flow from operating activities -1,018 -2,143 -1,743 Capital expenditure -5 -21 -45 Cash flow from investing activities -5,244 1,735 -1,274 Dividend (incl. tax) 0 0 0 Cash flow from financing activities 6,402 359 3,131 Net chg in cash 140 -50 113
Source: Company, Axis Securities
For additional information & risk factors please refer to the Red Herring Prospectus 10
About the analyst
Omkar Tanksale
Research Analyst
Call: (022) 4267 1737
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The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. The Company reserves the right to make modifications and alternations to this document as may be required from time to time without any prior notice. The views expressed are those of the analyst(s) and the Company may or may not subscribe to all the views expressed therein. Copyright in this document vests with Axis Securities Limited. Axis Securities Limited, Corporate office: Unit No. 2, Phoenix Market City, 15, LBS Road, Near Kamani Junction, Kurla (Itst), Mumbai-400070, Tel No. – 022- 40508080/ 022-61480808, Regd. off.- Axis House, 8th Floor, Wadia International Centre, PandurangBudhkar Marg, Worli, Mumbai – 400 025. Compliance Officer: AnandShaha, Email: [email protected], Tel No: 022-42671582.SEBI-Portfolio Manager Reg. No. INP000000654
For additional information & risk factors please refer to the Red Herring Prospectus 12