Zomato IPO: What the food tech says about growth, sustainability and competition
- The proceeds from the IPO will be used for organic and inorganic growth, with 25% earmarked for general corporate purposes
BENGALURU: The much-anticipated domestic public offer of food tech major, Zomato, is here, with the opening of the three-day share sale for retail investors on Wednesday. The price band for the IPO has been fixed at ₹72 to ₹76 per share.
The firm, which turned 14 this month, has seen its retail portion subscribed almost 100% within an hour of opening, and was subscribed 0.96% times so far, Mint reported on Wednesday morning, citing data from Indian exchanges.
Here’s a quick snapshot of what the company has said about its new areas of growth, competition and sustainability of food volumes:
Where will the proceeds go?
Earlier this month, Akshant Goyal, chief financial officer, Zomato Ltd, had said during a press conference that the proceeds from the IPO will be used for organic and inorganic growth, with 25% earmarked for general corporate purposes.
“Proceeds will be used for organic growth of the business, including newer customer acquisition and growing the delivery infrastructure, and technology platform. Second is for inorganic initiatives, which will include minority share purchases or full buyouts. If we come across opportunities which are strategic to our business and make sense, we will use the cash to make those investments. And thirdly the third bucket is general corporate purposes where we will be investing up to 25% of proceeds,” said Goyal.
Post IPO, Zomato will have close to ₹15000 crore (roughly $2 billion) in the bank to grow its business.
What is Zomato’s take on competition?
“Amazon has been in the food delivery space in India for a year now and we haven’t seen any impact on their or our market share. We think food delivery is a large fragmented market where we also compete with several online kitchens and offline restaurants. And the market will remain competitive whether or not there is Amazon,” said Goyal.
To be sure, Arch rival, Swiggy is also in the market, shoring funds for its ongoing Series J round and has already raked in $800 million in April at $5 billion valuation from Falcon Edge Capital, Amansa Capital, Think Investments, Carmignac and Goldman Sachs.
On Monday, it received CCI approval for an additional $450 million investment from Softbank, with its valuation expected to hike up to $5.5 billion.
Last year, even Amazon India entered the food delivery space and began pilots for food delivery in Bengaluru.
Does Zomato expect a dip in food orders once pandemic eases out?
“Our experience says once a consumer orders 2-3 times from a restaurant, it becomes a habit. And another thing is that for our Tier-2,-3, and -4 markets, we have been pleasantly surprised at the uptick and consumers have accepted food delivery. And we believe there is still a large market of consumers who haven’t ordered from food delivery apps yet,” said Gaurav Gupta, co-founder, Zomato Ltd.
So far, Goyal adds that Zomato hasn’t seen any impact on its food delivery volumes with covid-cases reducing and establishments opening up.
What is Zomato looking at as newer areas of growth?
Earlier this month, Zomato confirmed its re-entry into the grocery segment with an investment in Grofers and is also running pilots for its nutraceutical business.
“Grocery is a large opportunity and it is in the nascent stage right now, but growing rapidly. We think our platform lends itself well to us doing more than what we do today. So, I think we are actively experimenting in the (grocery) space, and recently invested $100 million for a minority stake in Grofers, with the idea of getting more exposure to that space and building our own strategies," said Goyal.
Goyal also added that apart from investing in Grofers, Zomato will also be launching groceries on its app soon, foraying into the space.
On nutraceuticals:
“Nutraceuticals is another attempt outside the core food delivery space we continue to experiment in and are still piloting the offering. I think the next few quarters will tell us the sustainability and viability of this business. We have launched this on a pilot basis in a few cities," said Goyal.
What is Zomato’s view on revenue drop?
According to Zomato’s RHP, the company’s year-on-year revenue fell by 24% to ₹1,994 crore in fiscal year 2020-21. Revenues from food delivery accounted for 86% of its revenues.
“The business has actually recovered, and our order volumes are higher than pre-covid levels. During Q4 of FY21, we have seen the highest gross order volume we have ever done for our food delivery business. So we are healthy from an economic standpoint and that will reflect in our results, going forward,” said Goyal.
How was the valuation arrived at?
At ₹76 per share, Zomato, one of the country’s largest food delivery platforms, will have a post-money valuation of ₹59,623 crore, ranking it at 78th position among listed firms in India by market value.
“The management team met more than 300 institutional investors, across all geographies, including US, Europe, Asia and India of course, and investors recognize several macro themes such as a very large growing addressable market, headroom for growth, and increased adoption of technology. So, all this really resonated well with industry,” said V Jayasankar, head of equity capital markets, Kotak Investment Banking, earlier, which is one of the lead book running managers for Zomato IPO.
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