Incorporated in 2010, Zomato is one of the leading online Food Service platforms in terms of the value of food sold. Its B2C offerings include food delivery and dining-out services where customers can search and discover restaurants, order food delivery, book a table, and make payments for dining out at restaurants while under the B2B segment, it generates revenue from Hyper pure (supply of high-quality ingredients and kitchen products to restaurants) and Zomato Pro, customer loyalty program. As of Dec’20, Zomato has established a strong footprint across 23 countries with 131.233K active food delivery restaurants, 161.637K active delivery partners, and an average monthly food order of 10.7M.
Zomato’s major revenue source is online food delivery through related commissions charged to its restaurant partners. Like Swiggy, Zomato also earns by delivery charges, surge fees (occasionally), while also offer various discounts under promotional schemes. But Zomato charges mandatory tips (@20 min) to its customers for its delivery personnel, unlike Swiggy where it’s voluntary.
Both food startups Swiggy and Zomato are offering good discounts, and competing fiercely with each other, especially in the last few weeks, when Zomato significantly offered more discounts just ahead of the IPO. Both Swiggy and Zomato are providing huge business/earnings opportunities, especially for MSME restaurant industries in addition to big brands (like KFC, Pizza Hut, Burger King, etc) amid COVD restrictions. Both Swiggy/Zomato earns from restaurant partners’ ad revenue on their platforms. Zomato has a strong network of 131.233K restaurants and 161.637K delivery partners.
Recurring COVID lockdowns are a blessing in disguise for both Swiggy and Zomato as due to various restrictions, foodies can’t dine out as before and are scrambling to take home delivery of restaurant foods; especially on the weekends as it’s now very difficult to visit a mall or hotel/restaurant for dining after 8/9 PM. Thus, food aggregators like Swiggy and Zomato are a part of ‘K’-shaped economic recovery post-COVID and also saved millions of jobs for MSME restaurants, many of which are only surviving for Swiggy/Zomato orders in COVID lockdown periods. Swiggy/Zomato is also providing a stable source of income/employment for its millions of delivery partners, many of whom are from very poor families.
As it will take significant time for India to fully vaccinate (two doses) at least 80% of its population, the country may not open fully in the foreseeable future, especially for consumer-facing service industry (like hotels&restaurants), demand for food aggregators like Swiggy/Zomato should be elevated. But if the country opens fully after Dec’21 including hotels& restaurants, shopping malls, etc, then we may see less demand for such food aggregators as the general public will prefer to dine out (pent-up demand).
Some pros & cons for Zomato:
- The growing Indian market for online foods amid COVOD scare, affordability, the digital revolution, and changing consumer psychology/demography; almost 85-90% of Zomato revenue comes from domestic operations; only around 10% of Indians regularly spend on hotel/restaurant foods
- Indian online food market is mainly dominated by Zomato and Swiggy, but Amazon (NASDAQ:) Food may be also a threat in the coming days as Amazon may try to disrupt the market to gain market share
- Zomato may grow both organically and inorganically to capture the external market, which is so far not a great story
- The growing trend of WFH is negative for food aggregators to some extent
- Growing discount/price war between Zomato and Swiggy may be riskier for Zomato as it’s now a listed public company, while Swiggy is still private being backed by global angel investors; i.e. ability of Swiggy to burn cash more than Zomato (Swiggy still not answerable to its shareholders)
- Dining out business affected in India due to various COVID restrictions, but the food delivery business supplement it as people now preferring eating out at home
- Swiggy is more aggressive than Zomato in signing well-branded exclusive local restaurants
- Apart from Swiggy, Zomato will face competition from other online chain restaurants (big brands) like KFC, Dominos, Pizza Hut, McDonald’s, etc
- As India may not allow hotels/restaurants to operate normally (full time) without adequate vaccination (2-doses), demand for online foods will be elevated at least till late 2022; but once hotels/restaurants are fully functional, it may also affect demand for online food aggregators like Swiggy/Zomato
- A vast part of the Indian upper middle class has not been affected financially in a meaningful way for COVID as a majority of them are either government employees/pensioners or employees of big private corporates, and their earnings were not affected at all or in a significant way; on the contrary, they will get salary/pension hikes (as DA/increment). Thus higher discretionary spending will help Zomato/Swiggy
In FY21, Zomato recorded revenue of Rs.1.99B against Rs.2.60B in FY20; i.e. a decline of -23.46% mainly due to COVID lockdown 1.0 (strict/national). But operating expenses also slid by almost -50% to Rs.2.45B in FY21 from Rs.4.86B in FY20. This has resulted in an EBITDA loss of -Rs. 0.454B against –Rs.2.25B in FY20; i.e. reduced loss.
The FY21 other expenses were down by almost -62% from FY20 levels, while FY20 was up by almost +38% from FY19 levels. The huge volatility is on account of ad & sales promotions (discounts), outsourcing, server & communication cost. Looking ahead Zomato management has to clarify whether such fall in key operating expenses is sustainable or it’s purely transitory in FY21 as restaurant food supplies were scarce in 1st half due to the effect of an all-out national lockdown 1.0 (COVID). During full/partial lockdown 2.0 in Q1FY22, most of the MSME restaurants were open for online delivery and there was no scarcity. Even if there will be any 3rd wave (COVID) in the coming months, MEME hotels/restaurants will be permitted to do online delivery (through Swiggy/Zomato) in any lockdown 3.0.
Fair valuation: Zomato (Rs.77.00-142.00 discounting projected FY: 25-26 operating EPS)
Considering all the pros & cons of Zomato as above and after analyzing the audited P&L account for the last few years, the trend of operating revenue and expenses, Zomato should be EBITDA positive by FY24; it’s currently paid a nominal interest for debt. Assuming it will have no significant debt after the IPO, the EBITDA/Share should be around 0.35, 1.03, and 1.90 by FY: 24-26 (assuming revenue CAGR +20% and operating expense +10%).
Like Jubilant Food, Zomato should also enjoy a ‘scarcity premium’ (almost monopoly in listed space) and thus assuming an average PE of 75, the FY: 25-26 fair valuation maybe around 77-142. The market is now actually discounting the FY: 25-26 projected earnings and thus Zomato should trade between 77 (IPO price) and 142 (listing day high 138) until further guidance, commentaries by the management, or any meaningful news impact.
On a listing day, Zomato was boosted by mainly institutional buying as many of them were not allotted any shares in the IPO bidding. Looking ahead, for any further rally, Zomato has to sustain above 150 levels for 226-331; otherwise, it will fall towards 100-77 levels. Thus an existing short-term investor/trader, who got Zomato in the IPO, may book profit around 140-150 levels and watch the next price action. If it sustains above 155 for a few days, he can renter targeting higher levels (226-331) or wait for dips around 100-77 for the reentry. This is also true for a new investor/trader; i.e. either buy above 155 or on dips around 100-77.
Financial analysis (P&L): Zomato