PremiumZomato Ltd has begun its post-listing journey with far less transparency compared to the high benchmark it set during its public offering of shares last month. When it courted investors for the ₹9,375 crore issue, it shared details such as monthly active users (MAU), monthly transacting users (MTU), active food delivery restaurants, active restaurant listings, average order value (AOV), number of orders, gross order value (GOV) and unit economics/contribution margins.
In its first filing post-listing for the June quarter, investors got a peek only into the GOV of the food delivery business, and none of the other metrics were quantified. It also said it will do earnings calls with analysts only once a year, at the end of each fiscal. “(The Zomato) release lacks details on MTU, AOV & unit economics (provided in red herring prospectus), which could disappoint investors as could the decision to have an annual earnings call," said analysts at Jefferies India Pvt. Ltd.
But investors are showing no signs of disappointment; instead, they drove Zomato shares 9% higher post-results.
Perhaps, they are excited about the 37% sequential growth in GOV in Q1. But note that dine-in services were impacted owing to the second wave, giving a boost to food delivery services. In any case, on a two-year CAGR basis, GOV has risen by only around 26%, about half the perceived growth of 50% investors have in mind for Zomato.
In comparison, Jubilant Foodworks reported a two-year CAGR of 22% for the delivery business of its Domino’s franchisee in Q1. And it did so without breaking a sweat, with the firm reporting an Ebitda of ₹212 crore on revenue of ₹879 crore last quarter. Ebitda stands for earnings before interest, tax, depreciation and amortization.
Zomato’s delivery commissions and other revenues added up to a nearly similar revenue of ₹844 crore, but at the Ebitda level, it reported losses as high as ₹376.5 crore, which includes a ₹170 crore cost related to options granted to its chief executive officer (CEO) in April. The accounting fair value of the options granted was ₹1,364 crore, although it’s worth noting that the market value at current prices is over ₹5,000 crore. But even adjusted for the amortized stock options expenses, Zomato’s loss at the Ebitda level rose to 20.9% of revenue in Q1, from 17.4% in the March quarter. Clearly, the sequential growth in GOV has come at a high cost.
So, Zomato’s growth is only slightly higher than that of Domino’s, but it spends ₹145 in operating costs for every ₹100 of revenue, whereas the latter spends only ₹76 for every ₹100 of revenue. But evidently, investors have no time for these inconvenient truths. Analysts are busy estimating revenues 10 years from now and discounting them back to present value. We are told Zomato’s valuations on a price-sales basis are reasonable using such methodology, based on the logic that Indian food delivery firms are 10 years behind global peers.
Some of them may be content if Zomato’s management appears just once a year and says, “We are confident about achieving your 10-year vision for us." By getting rid of the many metrics that were present in its red herring prospectus, and opting for an annual earnings call, Zomato’s management has already indicated they may not mind such an approach.
Perhaps, Securities and Exchange Board of India (Sebi) should consider a separate set of rules for companies where investors have a very long-term vision.
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