ZOMATO IPO

Zomato offers services such as ordering food delivery, table reservation for dine-outs to the customers while for restaurants it offers efficient last-mile delivery services along with high-quality ingredients through Hyperpure. It has presence across 525 cities in India with 389,932 active restaurant listings out of which 148,384 active food delivery restaurants apart from 169,802 active delivery partners as of March 2021.
Now let’s analyze Food Delivery Services business vertical: 1) Zomato earns commissions from the restaurants as an agreed-upon rate and revenue from advertisements made by the restaurants on its platforms while it incurs costs such as discounts offered to the customers (Zomato funded) apart from additional fees paid to the delivery partners, 2) The restaurants get order value of food & packaging charges netted against the restaurant funded discount & commissions, 3) The delivery partners receive the delivery charges collected from the customers in addition to additional fees paid by Zomato.
Coming to Dine-outs which is the largest food focussed restaurant listing and reviews platform in terms of customer base, revenue stream only includes the revenue through advertisements made by the restaurants for greater visibility. While Hyperpure is a segment that supplies quality ingredients to the restaurant partners improving the food quality being served and making their supply chain more effective (supplied ingredients to 9,225 partners across six cities in India generating revenues of Rs.148.88 Mn, Rs.1,075.86 Mn & Rs.2,001.97 Mn during FY19, FY20 & FY21 respectively). At last, Zomato Pro receives subscription charges from the customers while its cost drivers include the discounts offered at the restaurant partners. Zomato Pro has a customer base of 1.5 Mn and 25,443 pro restaurant partners – generated revenue of Rs. 562 Mn, Rs. 878.94 Mn & Rs. 575.14 Mn during FY19, FY20 & FY21 respectively.
About the impact of the pandemic on the business, gross order value has come down by ~16% while total income has come down by ~22% as compared to the previous year. Apart from that, the pandemic has enhanced digital adoption which may be beneficial for the entire food delivery services industry. Looking at the charts, ad spends as a % of total income has come drastically down from 88.43% back in FY19 to 24.88% during FY21 – however, it may be attributable to the customers being primarily at home leading to lesser scope for dine-outs which in turn might have reduced the ad spend during the last year.

Revenue ShareFY16FY17FY18FY19FY20
Delivery4%18%56%76%82%
Dine-outs including Zomato Pro96%82%44%23%41%
B2B Supplies (Hyperpure)   1%4%

Out of India’s GDP, approximately a quarter comes from food consumption which is primarily home-cooked food while non-home cooked food contribute only 8-9% of the entire market which is substantially lower as compared to the economies such as US & China which have approximately 47-50% and 42-45% contribution from food services respectively (out of total food consumption). It shows the underpenetrated food services market which has potential to grow in aid of the factors such as increasing internet & smartphone penetration along with the following factors: 1) Rising services consumption due to increase in communication infrastructure, education, capex spend by the government leading to more job opportunities, 2) Large working population – 54.6% of India’s population being in the workforce bracket & 3) Growth in urbanization – 34-35% of India’s population resided in Urban towns during 2020 which is expected to reach at 37-38% by 2025.
Coming to the internet user base, it has grown at a CAGR of 16% from 2015 to 2020 on the back of cheaper data availability (lesser than a dollar per GB) and is expected to grow at a CAGR of 8% from 2020 to 2025 reaching at approximately 970 to 1,000 Mn users. The internet penetration reached at 49% during 2020 up from 24% during 2015 which is expected to reach 68% by 2025 (the numbers for China are 49%, 68% & 85% for 2015, 2020 & 2025 respectively). Apart from that, looking at the activity data, the penetration of online services among the internet users is at 43% while the same for China is at 80% among the internet users during 2020. Online shoppers among the internet users at 24% while 69% for China – all the data points showing enormous potential for the online services market including food delivery services.

ParticularsUnitIndiaUSChina
PopulationBn1.380.331.44
Access to Internet / Population%49%94%68%
Online Food Delivery Market$ Bn2.949110
Restaurant Food / Food Consumption%8-9%47-50%42-45%
Order Food Delivery UsersMn50-55100-125500-550
Online Food Delivery Users / Access to Internet%8%38%53%

Although the outlook for the industry seems bright which implies healthy top-line, the financial performance would probably revolve around the cost controls and ad spends (including customer acquisition & appeasement costs). On the back of higher commissions & delivery charges per order and reducing discounts & delivery costs have improved the contribution per order significantly during FY21 – Rs.20.5 per order as against a loss of Rs.30.5 during the previous year.
Apart from that, a few of the critical virtuous cycle would be related to the content and reviews posted by the customers – rich content by the restaurants and the customers leading to more customers to the platform which reduces the customer acquisition cost. Simultaneously, being on a platform where there are more users to be beneficial for the restaurant partners which increases the choices available for the customers which again leads to more users to the platform. As the number of orders increases on the platform, utilization for the delivery partners improve which reduces the delivery cost – overall cost for Zomato as well as customer comes down leading to the addition of more customers and restaurant partners. In the table below the spending pattern of the retained customer is given (i.e., a customer who has started using the platform in FY17 has increased his spending (gross order value) by 190% by FY21).
Moving on to the key risks to the operations, it includes: 1) profitability remains uncertain for the foreseeable future as acquiring new customers would require promotions indicating losses would continue to fuel the growth to expand the customer base, 2) Switching cost for the customers as well as the restaurant partners would be lower given that many of the restaurant partners are available on both the major platforms i.e., Swiggy & Zomato (overall food delivery services market is quite competitive leading to cash burn by the players to appease the customers), 3) Entry barriers are lower; however, it would not b easier to establish the brand recognition.

Cohort Y1 Y2 Y3 Y4 Y5
FY17 1.0 x 1.6 x 2.2 x 3.0 x 2.9 x
FY18 1.0 x 2.0 x 2.7 x 2.4 x
FY19 1.0 x 1.6 x 1.1 x
FY20 1.0 x 0.7 x
GOV Retention – Customer Spend over the Years
CohortY1Y2Y3Y4Y5
FY171.0 x1.6 x2.2 x3.0 x2.9 x
FY181.0 x2.0 x2.7 x2.4 x
FY191.0 x1.6 x1.1 x

FY201.0 x0.7 x

Name of the Shareholder% of the pre-Offer Equity Share Capital
Info Edge (India) Limited18.68%
Uber B.V.9.19%
Alipay Singapore Holding Pte. Ltd.8.39%
Antfin Singapore Holding Pte. Ltd.8.26%
Internet Fund VI Pte. Ltd.6.04%
SCI Growth Investments II6.03%
Deepinder Goyal5.55%
Foodiebay Employees ESOP Trust (ESOP 2014)4.20%
D1 Master Capital Partners LP3.83%
MacRitchie Investments Pte. Ltd.3.68%
Name of the Shareholder% of the pre-Offer Equity Share Capital
Info Edge (India) Limited18.68%
Uber B.V.9.19%
Alipay Singapore Holding Pte. Ltd.8.39%
Antfin Singapore Holding Pte. Ltd.8.26%
Internet Fund VI Pte. Ltd.6.04%
SCI Growth Investments II6.03%
Deepinder Goyal5.55%
Foodiebay Employees ESOP Trust (ESOP 2014)4.20%
D1 Master Capital Partners LP3.83%
MacRitchie Investments Pte. Ltd.3.68%