Zomato coming with an IPO to raise Rs 9896 crore

Zomato

• Zomato is coming out with a 100% book building; initial public offering (IPO) of 1,30,20,83,333 shares of Rs 1 each in a price band Rs 72-76 per equity share.
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on July 14, 2021 and will close on July 16, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 1 and is priced 72 times of its face value on the lower side and 76 times on the higher side.
• Book running lead managers to the issue are Kotak Mahindra Capital Company, Morgan Stanley India Company, Credit Suisse Securities (India), BofA Securities India and Citigroup Global Markets India.
• Compliance Officer for the issue is Sandhya Sethia.

Profile of the company

The company’s technology platform connects customers, restaurant partners and delivery partners, serving their multiple needs. Customers use its platform to search and discover restaurants, read and write customer generated reviews and 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 providing a reliable and efficient last mile delivery service. It also operates a one-stop procurement solution, Hyperpure, which supplies high quality ingredients to restaurant partners. It also provides its delivery partners with transparent and flexible earning opportunities.

The company’s business is built around the core idea that over time, people in India are going out to eat at restaurants more than they cook at home. To capture value out of this shift in customer behaviour, it has two core business-to-customer (B2C) offerings - (i) Food delivery and (ii) Dining-out, in addition to its business-to-business (B2B) offering (iii) Hyperpure. Another important part of its business is (iv) Zomato Pro, its customer loyalty program which encompasses both food delivery and dining-out. Each of its B2C as well as B2B offerings help increase the value of its platform for its customers, enabling it to further attract new customers and to deepen engagement with existing customers. Each of its offerings also helps improve Assortment, Affordability, Accessibility and Quality (AAAQ) of restaurant food for its customers thereby helping grow the restaurant industry.

Proceed is being used for:

• Funding organic and inorganic growth initiatives
• General corporate purposes

Industry overview

Food Services is a competitive market in India comprising food delivery players like Zomato and Swiggy, cloud kitchens like Rebel Foods and branded Food Services players (including quick service restaurants like Dominos, McDonalds and Pizza Hut, among others). Food delivery players also compete with multiple other participants in the Food Services industry including restaurants which own and operate their own delivery fleets, traditional offline ordering channels, such as take-out offerings and phone-based ordering, local publications, and other media, both online and offline where restaurants place their advertisements to attract customers. In this competitive market, Zomato has consistently gained market share over the last four years to become the category leader in the food delivery space in India in terms of GOV from October 1, 2020 to March 31, 2021. The chart below represents year-on-year growth of Zomato and the industry.

Food consumption, at $607 billion (Rs 42.5 trillion) in 2020 constitutes around a quarter of India’s GDP. Most of this though, is driven by home-cooked food. Food Services, defined as non-home cooked food or restaurant food currently contributes only approximately 8-9% to the food market. This is substantially low when compared to global economies like the United States and China which have approximately 47-50% and 42-45% contribution from Food Services respectively (of the total food consumption). According to RedSeer, as of 2019, the company have a large total addressable Food Services market opportunity of $65 billion (Rs 4.6 trillion) growing at 9% per annum to $110 billion (Rs 7.7 trillion) in 2025 with highly under-penetrated restaurant food-eating behavior today. However, due to Covid-19, the size of Food Services market opportunity reduced to $32-35 billion (Rs 2.2-2.5 trillion). While Food Services in India are highly under-penetrated, it is likely to grow steadily, taking share away from homecooked food as has been the trend in the past as well. Growth will be driven by changing consumer behavior, reduced dependence of millennials on home-cooked food/kitchen set-up, increasing consumer disposable income and spending, and higher adoption among the smaller cities.

Pros and strengths

Strong network effects driven by unique content and transaction flywheels: Restaurant listings on company’s platform include most of the following information and data points such as photos of the menu, photos of the restaurant premises, address and GPS coordinates, phone number, website, social media presence (Facebook and Twitter links), cuisine, opening timings, average cost for a meal, free parking availability, indoor or outdoor seating availability, free Wi-Fi availability, whether the restaurant offers live entertainment, has a smoking room, whether table booking is recommended, among others. It term this information about restaurants as ‘Structured Content’. It collects and curates all Structured Content using a feet-on-street approach, aided by in-house developed technology which helps it do this in a cost effective manner. The company’s customers value the rich content of the restaurant listings on its platform and further enhance the richness of the restaurant listing content by adding their own reviews and photos to the platform which leads to a virtuous cycle of more new customer acquisition.

Widespread and efficient on-demand hyperlocal delivery network: The company’s network of delivery partners collect food from its restaurant partners and deliver it to customers. Given the presence and interaction of the three stakeholders in a limited geographical area the delivery network is referred to as ‘hyperlocal’. Food delivery is highly complex as food is a highly perishable commodity, which requires careful handling while maintaining high levels of hygiene and real-time on-demand service. Its precise and real-time, demand forecasting, fleet optimization and intelligent dispatch technology optimizes matching of orders and delivery partners using machine learning. It encourage its delivery partners and restaurant partners to take several precautionary measures to mitigate food tampering including using tamper-proof tapes to seal the food packet, getting hygiene audits done and regular cleaning of delivery bags and boxes, thereby maintaining high standards of hygiene. It also educates its delivery partners to follow personal hygiene protocols.

The company has technology and product-first approach to business: The company 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. Its products refer to its website and mobile applications catering to its offerings to all three of its stakeholders, customers, restaurant partners and its delivery partners. It enables restaurant partners with fully automated order management systems. These systems offer dashboards that have features such as order transmission, order processing, menu synchronization, payment reconciliation, content promotion, marketing tools and invoice management features.

Strong consumer brand recognized across India: The company has a strong brand name and recall, across large and small Indian cities. Its offerings include both food delivery and dining-out, thereby giving it the ability to capture mind share of consumers for ‘non-home cooked food’. Its brand is synonymous with food and its customers associate it 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.

Risks and concerns

Face intense competition in food delivery: The markets in which the company operates are intensely competitive and characterized by low costs of entry, shifting customer preferences, fragmentation and frequent introductions of new services and offerings. In particular, the Indian food delivery industry is fragmented and intensely competitive. According to the RedSeer, in India, it compete with other food delivery companies, such as Swiggy, chain restaurants that have their own online ordering platforms, such as Pizza Hut, McDonalds and Dominos, cloud kitchens like Rebel Foods, other restaurants that own and operate their own delivery fleets and companies that provide point of sale solutions and restaurant delivery services. In addition, it competes with traditional offline ordering channels, such as take-out offerings, telephone-based ordering, and paper menus that restaurants distribute to customers as well as advertising that restaurants place in local publications and digital media to attract customers.

Face risks with respect to fraudulent activities engaged by restaurant partners on its platform: The company face risks with respect to fraudulent activities engaged by restaurant partners on its platform. Restaurant partners may engage in fictitious transactions with themselves or collude with third parties in order to artificially inflate their sales records, popularity and search results rankings. Such activity may frustrate other restaurant partners by enabling the perpetrating restaurant partners to be favored over legitimate restaurant partners, and may harm customers by misleading them that a restaurant is more reliable or trustworthy than the restaurant actually is. Although it has implemented strict measures to detect and penalize restaurant partners who engaged in fraudulent activities on its platform, there can be no assurance that such measures will be effective in preventing fraudulent transactions and that it will be able to detect fraudulent activities in general.

Rely on third-party service providers: The company currently avail services from third-party service providers, such as, customer and back-end support services (such as menu digitization, onboarding of delivery partners, accounts payables, call centers) and third-party delivery services to operate its platform. It does not have control over the operations of the facilities of these service providers that it use. The service providers’ facilities may be vulnerable to damage or interruption from natural disasters, cybersecurity attacks, terrorist attacks, power outages, and similar events or acts of misconduct. Its platform’s continuing and uninterrupted performance is critical to its success. It has experienced, and expect that in the future it will experience, interruptions, delays, and outages in service and availability from time to time due to a variety of factors, including infrastructure changes, human or software errors, website hosting disruptions, and capacity constraints.

Rely on the skills and experience of senior management: The company’s success is significantly dependent upon the continued service of its Founder and key management as well as other experienced personnel generally. If the company loses the services of any of the members of key management, it may not be able to locate suitable or qualified replacements, and may incur additional expenses to recruit and train new personnel, which could severely disrupt its business and growth. If any of its key managerial personnel joins a competitor or forms a competing business, it may lose customers, know-how and key professionals and staff members. Further, if any dispute arises between any of the members of its management and it, it may have to incur substantial costs and expenses in order to enforce any confidentiality, non-compete or similar provisions in its agreements with its Founder or key managerial personnel in India, or it may be unable to enforce them at all.

Outlook

Incorporated in 2010, Zomato is one of the leading online Food Service platforms in terms of the value of food sold as of Dec 31, 2020. Its B2C offerings include food delivery and dining-out services where customers can search and discover restaurants, order food delivery, book a table, and make payments for dining out at restaurants while under the B2B segment, it generates revenue from Hyperpure (supply of high-quality ingredients and kitchen products to restaurants) and Zomato Pro, customer loyalty program. The company’s customers value the rich content of the restaurant listings on its platform and further enhance the richness of the restaurant listing content by adding their own reviews and photos to the platform which leads to a virtuous cycle of more new customer acquisition. On the concern side, the company rely upon restaurant partners on its platform and delivery partners to provide food to customers. If these restaurant partners experience difficulty servicing customer demand, producing quality goods, or meeting its other requirements or standards, or experience problems with their point-of-sale or other technologies, its reputation and brand could be damaged. As part of company’s business and operations in India and abroad, it is required to obtain various licenses and permits to run its business some of which may expire in the ordinary course and for which it would be required to apply to obtain the approval or its renewal. 

The issue has been offered in a price band of Rs 72-76 per equity share. The aggregate size of the offer is around Rs 9375 crore to Rs 9896 crore based on lower and upper price band respectively. On the performance front, the company’s total income increased by 96.23% to Rs 27,427.39 million in Fiscal 2020 from Rs 13,997.17 million in Fiscal 2019, primarily due to an increase in its revenue from operations by 98.44% to Rs 26,047.37 million in Fiscal 2020 from Rs 13,125.86 million in Fiscal 2019. Its revenue from operations increased primarily due to an increase in its food delivery business in Fiscal 2020 compared to Fiscal 2019. Its restated loss for Fiscal 2020 increased to Rs 23,856.01 million from a loss of Rs 10,105.14 million for Fiscal 2019. The company intends to attract new customers to its platform and convert them into active, frequent customers of its offerings. It will also continue to focus on increasing engagement with its existing customers to use its platform more frequently. It plans to grow its Zomato Pro membership base. To ensure the right selection and assortment for customers on its platform, it will continue to invest in growing the breadth, depth and quality of restaurant partners for its offerings. It will continue to deepen its relationships with restaurant partners by innovating to increase its platform’s value proposition for its restaurant partners, expanding the suite of services offered to them, and driving differentiated partnerships with restaurants.