Zomato, India’s top online food delivery platform is getting ready for a massive IPO (initial public offering) with the Securities Exchange Board of India (SEBI). The food delivery aggregator plans to raise Rs 8,250 crore this year as the cases continue to grow and Zomato’s business is booming. The draft red herring prospectus (DRHP) with the market regulator confirms Zomato is aiming to raise Rs 8,250 crore in capital by offering the company’s equity shares for sale.
Rs 7,500 crore will be a fresh issuance. Rest of Rs 750 crore will be an offer for sale for its existing investor Info Edge.
Info Edge currently holds around 19 per cent stake in Zomato after it raised new funds apart from major shareholders: Sequoia Capital, VY Investment and co-founder Deepinder Goyal.
Losses Shorten, Investors Keep Throwing Cash
Zomato reported losses in all the last three fiscal years. Till December 31, 2020, it reported a loss of Rs 6,82.20 crore. For fiscal year 2020, 2019 and 2018, the food aggregator reported losses of 2,385.60 crore, Rs 1,010.23 crore and Rs 106.91 crore, respectively. Zomato raised $250 million in the before the IPO a few weeks back.
It currently valued at $5.4 Billion backed by strong investors as Kora Management, Tiger Global, Fidelity, Dragoneer and Bow Wave. The majority stake is held by Info Edge, the Naukri.com parent company.
In December 2020, it was valued at $3.9 billion with fresh investments from ten new investors including Tiger Global, Kora, Luxor, Fidelity (FMR), D1 Capital, Baillie Gifford, Mirae and Steadview.
Growing, The Next Big Thing
Zomato is also planning to privately raise up to 15 billion rupees (around $200 million) before the IPO. Founded in 2008, Zomato started with online menu listings of cafes and restaurants which later turned out to be one of India’s most successful startups.
Currently with more than 5,000 employees, Zomato is available in more than 10,000 cities in more than 20 countries like Sri Lanka, Slovakia and South Africa.
The Zomato Growth Boom: Pandemic The Key Factor?
While the pandemic played a major role in boosting up the food delivery business as like the competitors, it’s how Zomato plans to execute post-covid will impact the market performance. The gross order value in the December 2020 quarter is again back to the pre-pandemic levels, but contribution margin is now positive.
The first three quarters of financial year 2021 contributed a margin of Rs22.9 per order for Zomato, compared to a loss of Rs 30.5 per order in FY20.
This excludes the costs for marketing, branding and other fixed operating costs. The positive contribution margin had been on the mend even before the pandemic, and has turned positive since the first quarter of FY21.
Cash Flows Continue To Worry: Positive Ahead?
Zomato is said to be investing heavily into advertising, marketing and promotions by expanding into new segments of markets within the country and abroad and keep upgrading its platform to offer a more seamless experience to customers and expand delivery partner network. While Zomato has continuously struggled to generate profit, the pandemic played a big role in giving it a strong push with a positive future being expected ahead.
The cash flows haven’t been on the good side, and the operational costs remain a major cash burner. The cash outflow from operating activities stands at Rs 269 crore in the last three quarters ending December with negative operating cash flow in the last three fiscal years.
Zomato Future: What’s In For Investors?
Zomato is currently valued at $5.4 billion, and the IPO fever will keep adding more to the valuation. Poor record mount to aggressive investments in advertising, promotions and operations. The company is expected to spend more to scale-up operations and acquire new customers. Most investor gurus have hinted at the Zomato IPO being grossly overvalued, but it’s expected to grow in future as the company tends to bring in a behavioral change among customers.
With contribution margin growing, Zomato will probably turn profitable for investors in the long run.