The ip window will be between 14 to 16 july 2021, and the ipo size is rupees 9375 crore, which is the highest in the last 16 months after sbi card ipo in march 2020. At the price band of rupee 76 zomato would be valued at rupees. 60. 000 crore, so it is going to be a big ipo and the first tech unicorn to go for public listing i’m sure there is a lot of curiosity about this ipo and whether it is worth applying or not hello, friends, my name is sahil, and this is My personal finance academy, where i explain everything about money management in layman’s language. If you are following my channel, then you would know that i already created an in depth video on tomato business, where i explained the business model of the company, its key strength, competitors and financials, including the unit economics. That is how much money it spend to acquire. A single customer so in this video i will quickly touch base upon the business of the company and its financials. Then i will look at the ipo details and then i will discuss the most important aspect. That is valuation. Finally, i will give you my verdict on the ipo and tell if i am going to apply for this ipo or not all right, let’s get started so zomato is involved in two business segment b to b, that is business to business and b2c. That is business to consumer.
If you look at the b2c segment, zomato has two major offering first is food delivery, where customer can order the food online using zomato platform and second, is dining out that provides a platform to customer to search any restaurant in the city? Read and write reviews about their experience, explore the photos as well as menu card book a table and make payment, while dining out at the restaurant zomato is the biggest player in india in food delivery, business, which is growing at a very fast rate. As of december 20, zomato had 1.61 lakh delivery partners and 1.31 lakh active restaurant partners for fy 20.. Now, how does zumato earn money from food delivery, so zomato charges a commission to restaurant partners on food delivery. It also earns from the paid promotion of restaurants on the app. Then it also has b2b segment that includes your hyper pure that supplies high quality ingredients and kitchen products to the restaurant partners. Then it has a segment of zumato pro, which is a loyalty program for food delivery and dining out. Basically, zomatopro is an exclusively paid membership program that provides flat discount to the customer at selected, restaurant that have partnered with zumatro for pro membership. For example, if you become a pro member of zumato for let’s, say rupees 200 for three months in that you will get a lot of discount on restaurants that are part of zumato pro membership program. So this creates a steady revenue stream for the company.
As of december 2020, zomato has 1.4 million active pro customers and around 25 350 pro restaurant partners. If you look at the future growth respect, there is certainly a rise in online food delivery business due to an increasing business lifestyle. People now prefer to order food online. So far, this adoption is mainly in the metro cities of india but there’s, a huge scope of growth for online food delivery in non metro cities and small town of the country. One of the reason is convenience. Today, the majority of people have a smartphone and a decent internet connection that makes it super easy to order food online, but when there’s a huge market there’s a strong competition, zomata has competition from different segments. For example, swiggy is a competition to zumato. Then there are a lot of cloud kitchen platforms that create competition for zomato, then majority of qsr chains, like your dominoes, macd, etc have their own network of delivery. Finally, the big threat is from the amazon that has already started its online food delivery operation from bangalore. In the future, i expect that the feud delivery segment would seem more intense competition. If you look at the revenues, zomato revenues have doubled between 2018 and 19 from 1 ‘7 crore to rupees 2742 crore, but it fell down to 2182 crore and 21.. It was mainly due to covet lockdown, although the online food delivery was operational for a considerable period of time, but still the fi 21 revenues were lower than f120.
If you look at the profits, zomato is consistently in loss for the last three years. In march 2019, the loss was rupees 1010 crore. Then loss widened to rupees 2385 crore next year, then loss reduced to rupees, 814 crore and fi 21.. The reason for loss is mainly due to the fact that zomato is growing quickly and is spending a lot of money on marketing and advertising. Also, it is giving a lot of discount to attract new customers. Although zuma has significantly reduced its advertising and promotional cost, it is still at a loss. Company’S cash and cash equivalent situation for fr21 stood at 306 crore. All the company has some investment of around 2205 crore and bank balance of around 597 crore and other financial asset of rupees 629 crore, but the current cash and cash equivalent is only rupees 306 crore. If you look at the iq details, this romantic ipo window is 14 to 16 july 21. Ipo price band is between 72 rupees to 76 rupee. The total market lot is of 195 share at a face value of rupees one, so the minimum investment amount is rupees. Fourteen thousand eight hundred twenty and the maximum lot for retail investor is thirteen. The issue size is of rupees nine thousand three hundred seventy five crore out of which there’s a fresh equity of rupees, 9, 000 crore and remaining 375 crore is offered for sale where info is diluting its shareholding, rupees 9000 crore raised from the ipo would be used For organic and inorganic growth, including the acquisition and remaining, would be used for general corporate expenses.
Now the most important part, that is the valuation analysis at a price band of rupees 76 zomato, would be valued at 8 billion. That is around sixty thousand crore. So that would make zumato a large cap company now before we even discuss about the valuation are justified or not. Let me show you how zomato valuations have skyrocketed over the past few years. In february 19, zometo was valued at 2 billion, then in january 20 it was valued at 3 billion. Then in september 20 its valuation jumped to 3.3 billion. Then in december 20 the value should become 3.9 billion dollar. Then, in february 21, the valuation reached to 5.4 billion now in july 21, at the time of ipo companies valued at 8 billion that’s, a 48 increase in valuation as compared to four months ago. Now, normally, when we check the valuation of the company, it is compared to the earnings, but zomato is last making company that is, its earnings are negative, so the p model would not work with zumato. Now there are some other models, like your price to sales ratio and if you look at the price to sales ratio of zomato, its latest price to sales ratio is 28 times. But again we do not have any listed company in the food online space in india to compare the numbers again. There are some listed companies in u.s like your door dash, but we cannot compare the u.s market and india market as u.
s market is quite mature and indian market is still in its nascent stage. But now the question is whether it be 60, 000 crore valuation justified for a loss making company. It is difficult for me to digest. Maybe i am a bit old fashioned or i am not a high risk taker or probably i don’t know how to evaluate the valuation of a loss making company. So there is no doubt that the online food delivery market has a great potential, and the most common argument is that in technology business you are initially at a loss and then you acquire customer and then you become profitable. I take that point. The idea is similar in the online food business. They want more and more people to start ordering online food and once they acquire enough customers slowly, they will reduce the discount and increase their commission from restaurant. And of course, there is a range to become the number one player in online food delivery and zumato is ahead of swiggy, but the biggest risk for tomato is not swiggy. The biggest risk is players like amazon. Amazon has already entered into the online food delivery. Business. Now think about this as a user, when you order the food from your favorite restaurant, does it really bother if it is from zomato or swiggy or amazon? What, if tomorrow, reliance also get into the business and start giving you the same food at lower price won’t? You switch well, i would so.
I don’t see a huge economic mode with zumato that nobody can replace it. What, if, tomorrow, your favorite restaurant delist themselves from zomato and move to another platform? Obviously you would also move to another platform. In fact, if you look at the gray market premium of zumato, it is around 15 to 20 percent, which is not that high. Now, why is the gray market premium, not 50 or 100 percent? I mean there is certainly a hype and people will apply for somato ipo, as everyone wants a slice in that online food market, but for me, a valuation of 60 000 crore for a loss making company is not easy to digest. On top of that, like i said, i don’t see a very thick economic mode with zomato. Of course they have the brand name and strong distribution network, but this online food sector would see more intense competition with giants like amazon entering into it, and zomato would have to continue burning cash to sustain its position. So i don’t see zumato making profit in the near future. It has been a great investment for companies like info edge, that invested in zumato at a very early stage. In fact, info has shown tremendous confidence in the company. It holds around 9400 crore worth of tomato share at least 76 prize band, and it is only selling shares worth rupees 375 crore. But today zomato is already a large cap with an ipo valuation of rupees, 60 000 crore and i don’t see zomato growing 10 times in the next 10 year to become a 6 lakh crore company.
So i would give it a miss, maybe in the future, if there’s a correction in the share price – or i see some sign of profitability, then i might consider zomato, but for now it’s a miss from my side. Having said this, online food delivery is a very exciting sector and certainly worth keeping an eye.