News Analysis

Zomato: Investors biting more than they can chew

Hari Viswanath BL Research Bureau | Updated on July 23, 2021

Listing day gains are unsustainable

After much hype and frenzy running into its IPO, in sync with the trend seen across most initial public offering’s this season, Zomato listed at ₹115 – a premium of around 51 per cent on BSE to its issue price of ₹76. After making further gains to reach a high of ₹138, at the time of writing this, the stock was trading at ₹124 – up 63 per cent from its issue price.

Zomato was very expensively valued even at its IPO price of ₹76, hence investors who have been allotted shares can book profits and conserve their cash. At its current price, Zomato trades at around 47 times price-to-sales (FY21 operating revenue). These are valuation levels that are difficult to sustain even for highly profitable high-growth companies.

With Zomato unprofitable even at the EBITDA level and no clarity on when it will reach profitability or stem cash burn, its current levels will not sustain in the medium to long term. Current pricing appears to be more driven by frenzy and easy money than fundamentals.

Besides, company also faces competitive threats from deep-pocketed Amazon that is readying for take-off in this business segment. Zomato's frenemy relationship with National Restaurant Association of India is also a hurdle that needs to be addressed to reach and sustainable profitability for the long term.

Business

Zomato’s core business is that of a technology platform that connects customers, restaurant partners and delivery partners. Customers use its platform to search and discover restaurants, read and write customer reviews and view and upload photos, order food delivery, book a table and make payments while dining out at restaurants. The company wants to build its business across four revenue streams – food delivery, dining out, supplying raw materials to restaurants and Zomato pro (customer loyalty program).

At present, food delivery is the primary contributor to its topline. The revenue model here is based on a commission (known as the take rate) that Zomato retains out of the gross order value (GOV) made by a customer to a restaurant on the Zomato platform. The value proposition for customers from Zomato is that of convenience and a variety of offerings, and that for restaurants is discovery and sales.

Financial results

Zomato reported an operating revenue of ₹1,994 crore in FY21, down by around 23 per cent over FY20. The company attributes the decline to Covid related disruption in FY21. However, the extent of decline is still of concern, as after the initial lockdown last year and gradual reopening post that, app-based digital platforms saw significant structural benefits as more people embraced digitisation.

For example, US listed food delivery company Door Dash saw its revenue in covid impacted CY2020 grow by 226 per cent. Zomato has been EBITDA and cash flow negative in recent years including FY21. EBITDA margin for FY21 was at negative 15 per cent.

Published on July 23, 2021

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