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Sector Report SECTOR REPORT INTERNET TECHNOLOGY 09 April 2021 Zomato: Leading Indian foodtech play Zomato’s latest pre-IPO funding round elevates its valuation to US$ 5.4bn vs. Ruchi Burde | Seema Nayak US$ 3.9bn in Dec’20, on the back of (1) recovery from the initial Covid-led volume [email protected] slump, (2) improving unit economics, and (3) successful listing of US counterpart DoorDash. Despite DoorDash’s stronger annual revenue and margins, we believe Zomato’s valuation is justified given potential demand scalability in India’s growing, duopolistic market. INFOE which holds 18.4% stake (new Zomato-led TP of Rs 2,780 vs. Rs 2,680) remains a SELL because of weakness in its core businesses. Food delivery business rapidly emerging from Covid slump: Covid-19 caused food KEY RECOMMENDATIONS delivery volumes in India to drop 90% during the initial lockdown phase in Mar’20 Ticker Price Target Rating due to migration away from large cities. For food delivery app Zomato, the INFOE IN 4,842 2,780 SELL Price & Target in Rupees | Price as of 8 Apr 2021 pandemic has reduced revenues but accelerated its journey toward profitability as unit economics improved with higher average order value and lower delivery costs, discounts and staff expenses. Margins at peak levels; expected to settle lower: Zomato’s margin contribution per order has improved dramatically from a loss of –Rs 47 in Q1FY20 to +Rs 27 in Q1FY21 (Fig 16). Management expects this metric to eventually normalise to Rs 15-20 per order and also indicated that the average monthly burn rate has shrunk from US$ 12mn in FY20 to US$ 1mn in FY21. Uptick in GMV: Zomato’s gross merchandise value (GMV) nearly doubled in FY20, partly aided by its Uber Eats acquisition in Jan’20. A swift transition enabled retention of 97% of combined GMV. Following the Covid outbreak, GMV fell 80% from the FY20 peak before returning to 60% of pre-Covid levels in Jul’20. Spillover effect from DoorDash valuation: In Dec’20, US-based food delivery app DoorDash’s pre-IPO valuation was pegged at US$ 16bn. Its latest valuation is a whopping US$ 55bn given strong topline growth, high customer retention and a favourable profit trajectory (46% YoY decline in EBITDA loss in FY20). This stellar valuation appears to have rubbed off on Zomato which closed a US$ 250mn funding round in Feb’21 ahead of its planned IPO later this year (source: media reports), valuing it at US$ 5.4bn from US$ 3.9bn in Dec’20. Although DoorDash operates in a far more mature market, we believe Zomato’s valuation is justified given immense growth potential in India’s densely populated, digital-driven, duopolistic food delivery market (Swiggy the only credible competition). BOB Capital Markets Ltd is a wholly owned subsidiary of Bank of Baroda Important disclosures, including any required research certifications, are provided at the end of this report. INTERNET TECHNOLOGY Contents Focus charts ................................................................................................. 3 Global foodtech market ............................................................................... 4 US .............................................................................................................................. 5 Europe ....................................................................................................................... 5 China ......................................................................................................................... 6 Indian foodtech market ............................................................................... 7 Road to a Zomato–Swiggy duopoly ........................................................................ 8 Cloud kitchens fail to take off ................................................................................. 9 Why Zomato merits premium valuations .................................................. 10 Improving operating metrics .................................................................................. 10 Strong domestic market tailwinds .......................................................................... 11 Zomato vs. Swiggy ....................................................................................... 15 Financials – Zomato moving towards profitability ............................................... 15 Loyalty programmes – Swiggy falters amid pandemic ........................................ 16 Funding – Zomato now in the lead ........................................................................ 17 Retain SELL on Info Edge .......................................................................... 19 EQUITY RESEARCH 2 09 April 2021 INTERNET TECHNOLOGY Focus charts FIG 1 – INDIA’S SMARTPHONE/INTERNET USER BASE FIG 2 – PER CAPITA DISPOSABLE INCOME GROWING ON STRONG GROWTH TRAJECTORY AT A STEADY RATE (in mn) no. of internet connections in India (Rs) Per capita GNDI 1,200 160,000 144,429 975 131,580 927 140,000 1,000 876 119,826 821 109,315 761 120,000 100,439 800 697 91,843 100,000 82,408 600 80,000 60,000 400 40,000 200 20,000 0 0 2020 2021E 2022E 2023E 2024E 2025E 2013 2014 2015 2016 2017 2018 2019 Source: BOBCAPS Research , Statista Source: BOBCAPS Research , RBI | GNDI – Gross national disposable income FIG 3 – INDIA’S INTERNET ECONOMY BOOMING FIG 4 – SUBSTANTIAL HEADROOM FOR GROWTH IN ONLINE RETAIL Online retail (US$ bn) India's internet economy 5% 400 335 300 250 200 125 100 0 Offline retail 2018 2020 2025E 95% Source: BOBCAPS Research , IBEF Source: BOBCAPS Research , IBEF FIG 5 – PEER COMPARISON SHOWS ZOMATO’S FIG 6 – ZOMATO’S DECLINING NET LOSSES VIS-À-VIS SIMILAR TRAJECTORY TO DOORDASH SWIGGY IN 2020 US$ mn FY19 FY20 YoY growth (%) (Rs bn) Zomato Zomato Swiggy 66 Revenue 192 394 105 80 60 46 EBITDA loss 277 293 6 38 40 23 25 25 13 10 11 GMV 718 1,496 108 20 6 Swiggy 0 Revenue 152 410.5 170 (20) EBITDA loss 318 544.5 71 (40) (21) (60) (37) GMV NA NA DoorDash Operating Advertising Employee Total Net cash Loss revenue expenses benefit expenses flows from Revenue 885 2,886 226 costs operating EBITDA loss 584 316 (46) activities GMV 8,039 24,664 207 Source: BOBCAPS Research , Company Source: Company EQUITY RESEARCH 3 09 April 2021 INTERNET TECHNOLOGY Global foodtech market Across the globe, technology is the newfound ingredient in people’s diet. The global food-technology market totalled US$ 220.3bn in 2019 and is expected to clock a 6% CAGR over 2020-27 to US$ 342.5bn. The biggest chunk of value from foodtech is expected to come from China at US$ 57bn by 2021, followed by US$ 28bn from the US, US$ 23.3bn from Europe and US$ 7bn from India. China is the biggest market in terms of volume, but the US and Europe are far ahead in terms of average order size. The US grew at 95% YoY in 2019, followed by 80% growth from Asia. However, the US and European markets are far more fragmented than those in India and Asia and do not enjoy the same demographic dividends. FIG 7 – COMBINED VALUE OF FOODTECH INDUSTRY REGION-WISE Combined value (US$ bn) US Europe Asia 2018 37 31 55 2019 72 43 99 YoY growth (%) 94.6 38.7 80.0 Source: BOBCAPS Research FIG 8 – MAJOR FOODTECH MARKETS ACROSS THE GLOBE Parameters US Europe China India Number of orders/ day (mn) 2.6 0.7 22 1.3 Key player DoorDash Just Eat Meituan Dianping Zomato No. of restaurants serviced 0.39 - 5 0.15 /day (mn) No. of orders/restaurant/day >10 8.2 4.4 10 Market share of top player (%) 45 50 32.2 50 Order size (US$) 33-37 26.4 7-10 3.6 Number of cities covered 4,000 100-200 1,300-2,000 450-500 60% of US consumers order 80% of UK users of food In 2020, >40% of internet As of 2019, millennials Other remarks delivery or takeout once a delivery apps never or rarely users in China had used online formed ~63% of India’s online week switch between platforms food delivery services food delivery user base Source: BOBCAPS Research EQUITY RESEARCH 4 09 April 2021 INTERNET TECHNOLOGY US The US foodtech market is in the range of US$ 18bn-20bn and is fragmented in nature with four key players – DoorDash & Caviar (combined), Uber Eats, Grubhub and Postmates, along with a few other smaller players. DoorDash and Caviar together currently have over 50% market share. FIG 9 – FRAGMENTED US FOODTECH MARKET Source: BOBCAPS Research | Business of apps Europe Revenue from online food delivery in Europe is expected to reach US$ 23.3bn by 2021 and US$ 25bn by 2023, with an estimated CAGR of 7.06% over 2021-24. According to Dealroom data, over EUR 1.6bn was invested in European food logistics and delivery businesses in 2019. FIG 10 – MARKET SHARE OF FOOD DELIVERY APPS IN EUROPE Source: BOBCAPS Research | Business of apps EQUITY RESEARCH 5 09 April 2021 INTERNET TECHNOLOGY Grubhub–Just Eat Takeaway deal In Apr’20, a US$ 7.8bn merger between Just Eat and Takeway.com created one of the largest food delivery groups in the world. Later in June, the merged entity Just Eat Takeaway announced that it was acquiring US-based online food delivery platform Grubhub for US$ 7.3bn. With this, Just Eat Takeaway gained Grubhub’s 23% market share in the US. This acquisition was an all-share deal – 1 Grubhub share was swapped for 0.67 shares of Just Eat Takeaway at an implied value of US$ 75.15 for each Grubhub share. The deal led to increased scale, competitiveness, diversity and cash flow of the combined business. China China currently has a large base of 300mn active users on online delivery portals, up from 114mn users in 2016. Revenue from online food delivery is expected to reach US$ 57bn by 2021, with an estimated CAGR of 5.9%
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