Indian investors went berserk last week over the IPO of Zomato, a food service platform. The issue of Rs.9000 crores of equity and Rs.375 crores OFS (offer for sale from InfoEdge, an earliest and exiting investor), The price band was Rs.72-76 per share. By close of bidding period, the issue had attracted bids for 27,51,27,77,370 shares, 38.25 times the issue size of 71,92,33,522 shares. Zomato will issue a total of 1233552730 shares, including a fresh equity issue of 1184210625 shares.
Zomato is a leading foodservice platform but has been suffering huge piled up losses. As against a valuation of 8 to 9 times in the global scenario of aggregators or service providers, the valuers pegged Zomato above 16% of its revenue. The company has to cover the accumulated losses to declare any dividend, which I hope will be in no time too soon. Zomato’s inorganic growth initiatives of Rs.6750 crores and general corpus needs flow into a grey area of obscurity.
Zomato faces stiff competition from Swiggy and Amazon, the latter, with deeper pockets. Their future sustainability of foodservice platforms can be by increasing their earnings from discounts offered by food outlets. Right now, 75% of their revenue is from the food delivery business. The hotels and restaurants suffering from Covid restrictions are tolerating a higher and unsustainable payout to the deliverers like Zomato, often coughing up beyond 25% of the cost of the food bill. A return to normalcy will end all optimism as soon as usual footfalls are registered in the eateries.
Zomato’s earlier forays into grocery delivery did not yield the desired results; though, with their investments in Grofers, they are trying a return in the segment. Zomato has 390k restaurant listings and a footprint in over 23 countries.
On the financial performance front, on a consolidated basis, Zomato has posted a total turnover of Rs.1397.72 cr. in FY19 with a net loss of 1010.51 cr. In FY 20, the TO was Rs. 2742.74 cr. and the losses were Rs. 2385.60 cr. In FY 21, the TO was Rs. 2118.42 cr., the losses, Rs.816.43 cr.
The five BRLMs associated with the offer have handled 14 issues in the past three fiscals (besides Zomato), out of which five issues failed to hold the minimum of the price band of the IPO offer.
The Rs.35000 crores online delivery market still has potential to grow, but Zomato’s survival depends on how firmly loyal its clients are to their service. Would the clients of Zomato not simply switch over to other competitors offering higher discounts?
It’s funny; no past performance matters and only future dreams do. I was awake and did not subscribe to the IPO.
Sampath Kumar
Intrépide Voix.
