ZOMATO IPO: It’s a bet on growth, says analyst

Zomato is present in nearly every city in India

Shares of Zomato, the mobile food ordering service, have been priced higher than those of similar peers, but the company can deliver returns if it can maintain its scorching pace of growth in the future, according to Indian broking house Nirmal Bang.

Zomato is currently in the IPO market trying to raise Rs 9,375 cr from investors to fund its growth and meet general corporate needs.

With competitor Swiggy, Zomato controls the vast majority of the Indian food delivery market, and had been doubling its revenue every year until the COVID-19 pandemic threw a wrench in the works.


Zomato has put a price on itself that is up to 28 times its annual sales, pointed out Akansha Jain, a research analyst at Nirmal Bang Securities. In comparison, similar companies across the world are valued much lower.

US-based DoorDash, for example, is valued at 18.6 times its revenue, while Germany-based Delivery Hero, which operators in four continents, is valued at just 11 times its sales.

China’s Meituan Dianping, which is considerably bigger than Zomato and has around 57 crore transacting users, is valued at 14.2 times its sales.

In addition to this, said Jain, Zomato makes considerable losses in its operations, though that is not unheard of for high-growth, early-stage internet companies.

It is also not clear if these companies have the same growth potential as Zomato, which has been doubling in size every year.

Zomato had a total revenue of Rs 1,313 cr in the year ended March 2019. This doubled to Rs 2,605 cr in the year ended March last year, before falling to Rs 1,994 cr in the year ended March this year due to the pandemic.

Zomato financials | Nirmal Bang

The company has also been making losses consistently.

Even though these losses are not declining as a rupee figure (without taking into impact the pandemic), the company’s tremendous growth means that the losses, as a percentage of sales, have been falling sharply every year.

For example, the company lost Rs 2,244 cr in its operations two years ago despite generating revenue of only Rs 1,313 cr, implying that operating losses were 171% of its operating revenue.

In the subsequent year, it lost a similar amount (Rs 2,305 cr), but by then, revenue had doubled to Rs 2,605 cr. As such, its operating loss — as a percentage of sales — fell to 88% from 171% in the previous year.

Finally, in the pandemic-impacted year of FY21, the company actually managed to bring down its losses in both rupee terms as well as a percentage of sales.

However, Jain pointed out that this may not prove to be enduring since a key reason for the lower losses was a reduction in marketing expenses by the company.

In terms of numbers, the company lost only Rs 467 cr during the pandemic year, compared to around Rs 2,300 cr in the preceding years. In other words, it reduced its operating losses by around Rs 1,800 cr.

However, a key reason for this was a deliberate reduction in spending. Zomato slashed its advertisement spending in the pandemic year by around Rs 800 cr and its outsourced support cost — such as for handling calls — by Rs 1,500 cr. In total, therefore, it saved around Rs 2,300 cr by spending less on these two items during the pandemic year.

Perhaps as a result of lower ad spends, the total sales also fell by around Rs 610 cr.

However, this decline of 23.5% in its revenue was despite slashing its ad budget by nearly 61%, indicating a certain amount of customer stickiness.

Moreover, pointed out Jain, the financials of the company’s operations have been improving because of leverage and better margins and commissions from restaurants.

In the pandemic year, the company generated around Rs 90 per order, out of which around Rs 27 was in the form of a delivery charge paid by the customer, while the remaining Rs 63 was in the form of commission from the restaurant.

Per-Order Financials | Nirmal Bang

In comparison to the Rs 90 that it was getting, it was reimbursing an average of Rs 46 as delivery cost to the delivery boy. There were also other costs associated with making the delivery, which came to another 15 rupees or so. Finally, it offered an app discount of around Rs 8 per order to the customer.

In total, therefore, Zomato was making around Rs 20.5 per order in terms of its gross profit. Of course, this calculation does not take into account Zomato’s fixed costs — such as the cost of its employees, call center, IT infrastructure, advertisements and so on. Taking everything into consideration, it was still making a loss.

Still, on a gross basis, the company was making a ‘profit’ of Rs 20.5 per order in the COVID year, while the preceding year, it was making a loss of Rs 30.5 per order even on a gross basis. This was because it used to get almost Rs 19 less per order as commission from restaurants and Rs 12 less from customers in the form of delivery charges.

Both of these went up during the pandemic period as restaurants were desperate for business, while customers were dependent on food ordering as eating out was prohibited.

The pandemic period also helped Zomato cut the average discount it was offering per order from Rs 21.7 per order in the previous year to Rs 8.3.

Because of all this, the company’s cash burn was reduced to Rs 1,017.9 cr in the pandemic year from Rs 2,143.6 cr in the year prior.

“However, with pandemic normalizing some of the cost is likely to come back which may impact cash flow going ahead,” analyst Akansha Jain added.

The future profitability of Zomato, she pointed out, would depend almost entirely on whether the company is able to grow aggressively as it has in the past, so that the costs can be spread over a larger pie of sales revenues.

The growth prospects, she pointed out, are bright from an environment or macroeconomic point of view.

“Food Services, defined as non-home cooked food or restaurant food currently contributes only approximately 8-9% to the food market India. 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. Internet penetration is also low when compared to other countries.

“With Easy availability of smartphones, cheap data and high speed 4G connections is leading to higher internet penetration and more Indians are adopting new digital applications,” she noted.

However, she pointed out, everything depends on the company being able to maintain its growth rate.

“Although the growth opportunity for Zomato is high, however, being into a highly competitive market, the company has to continuously invest to gain market share.

“Revenue if not scaled in comparison to investment may impact the profitability and lead to burning cash even going ahead and the Company may not get capital to burn before it turn cash positive.

“At the given upper price band of issue of Rs 76, Zomato is offered at EV/ Sales of 28.3x FY21. We have Neutral View to the issue,” she added.