Zomato! This word makes one think about food – Chicken Biryani, Shahi Paneer, Chole Bhature, Momos, and whatnot! So you name it, and it will satisfy all your food cravings. That is probably why it was the first startup unicorn to list on the stock markets, and its IPO was oversubscribed 38 times.
Zomato stock has been in the limelight for one reason or another since its IPO. So let us try to understand what the future looks like and whether it makes sense to invest in this company.
Zomato is an Indian multinational food delivery company that provides a platform for users to search for and discover restaurants, order food online, and make reservations. The company was founded in 2008 by Deepinder Goyal and Pankaj Chaddah and is headquartered in Gurugram, India.
Initially, it started as a restaurant review and discovery platform but has since expanded to offer online food ordering and delivery services. The company has acquired other food delivery companies like Uber Eats in India and a majority stake in Grofers (now renamed Blinkit), an online grocery delivery platform.
Currently, the company is one of the leading food aggregators in India, with an FY22 Gross Order Value (GOV) of Rs. 213 billion and average monthly transacting users of ~14.7m. It had a presence across 1,000+ cities in India with over >180k active delivery restaurants in FY22.
Zomato Company Journey
The journey began in 2008 when its founders launched the company as “Foodiebay,” a restaurant directory for the National Capital Region in India. The company initially focused on collecting and aggregating restaurant menus and reviews to help people make informed dining decisions. Following is a timeline of the major events in the company’s history:
- In 2010, the company rebranded as Zomato and expanded its reach to other cities in India. The company also began offering online ordering and table reservations, which helped it gain popularity and grow its user base.
- In 2012, the company launched its mobile app, which made it easier for users to search for restaurants and place online orders from their smartphones.
- In 2015, it launched its online food ordering and delivery service in India, which became a significant source of revenue for the company. The company also expanded its international operations, focusing on the Middle East and Southeast Asia.
- In 2018, it acquired Runnr, a hyperlocal logistics startup, which helped it strengthen its delivery capabilities.
- In 2020, it acquired the Uber Eats India business, which made it the largest food delivery player in India.
- In July 2021, Zomato went public, raising $1.3 billion in its initial public offering (IPO), making it one of the biggest IPOs in Indian history.
- In June 2022, The board approved the acquisition of Grofers (later renamed Blinkit) for INR 4,447 crore in an all-stock deal.
Zomato Management Profile
Mr Deepinder Goyal is the Founder, MD, and CEO of Zomato. Deepinder holds an integrated master’s degree in technology in mathematics and computing from the Indian Institute of Technology, Delhi. Before founding Zomato, he worked with Bain and Company.
Mr Akshat Goyal is the CFO. Akshat holds a bachelor’s degree from Delhi College of Engineering and a master’s from IIM Bangalore. He is a co-founder of Pinnacle Capital Solutions Pvt Ltd. He headed the corporate development at Zomato before becoming CFO.
Ms Akriti Chopra heads people development at Zomato. Before this role, she was the CFO of the company. She is a Chartered Accountant who has worked with Zomato for 11 years.
Mr. Albinder Dhindsa is the Founder & CEO of Blinkit. Albinder holds a bachelor of technology degree from Indian Institute of Technology, Delhi, and a master’s from Columbia Business School (Columbia University). Previously, he worked with Zomato from Dec ’11 to May ’14 as the Head of International Operations.
Mr Rishi Arora is the Co-Founder of Blinkit. Rishi has been with Blinkit for over eight years and was heading operations before being promoted to Co-Founder. He completed his master’s degree from the IE Business School.
Quite a few executives from the senior management team have left the company recently, including Mr Pankaj Chaddah (Co-Founder), Mr Mohit Gupta (Co-Founder), Mr Rahul Ganjoo (Head of New Initiatives) at a time when the food tech major saw one of the steepest declines in market capitalization among new-age tech stocks in 2022.
Zomato Shareholding Pattern
Zomato Business Segments
Zomato’s technology platform serves multiple needs by connecting customers, restaurant partners, and delivery partners. Customers use Zomato’s platform to search and discover restaurants, read and write customer-generated reviews, view and upload photos, order food delivery, book a table, and make payments while dining out at restaurants.
Zomato has four core offerings –
- Food Delivery: The Company generates most of its revenue from food delivery and related commissions charged to its restaurant partners for using its platform. Restaurant partners also spend on advertisements on its platform.
- Hyperpure (B2B supplies): Through Hyperpure, Zomato supplies ingredients spanning fruits and vegetables, groceries, dairy, poultry, meats and seafood, bakery items, gourmet and packaged foods, beverages, and packaging to its restaurant partners. As the company expands into the quick commerce segment, its built-in Hyperpure capabilities will come in handy. As of March 2022, Hyperpure had a presence across ten cities and provided supplies to 51,000 unique restaurants.
- Dining-out, Zomato Pro (membership/loyalty program), and others: This comprises Dining-out and the sale of subscription programs (Zomato Pro). Dining out is monetized through advertisements by restaurants for visibility on the platform. In August 2022, the company announced discontinuing its ‘Pro’ and ‘Pro Plus’ programs for its customers and replaced that with a new loyalty plan called Zomato Gold.
- Quick Commerce Segment: Zomato announced the acquisition of Blinkit to foray into the quick commerce segment. Blinkit operates in the quick commerce business and delivers a wide range of essential spending, including groceries, fruits and vegetables, beauty and personal care, OTC medicines, and stationery items, among others, within a few minutes.
Zomato Fundamental Analysis
Food Delivery Business:
The online food delivery business of Zomato can be understood using the image below. Any improvement in Monthly Transaction users and frequency will boost the number of orders. In addition, any improvement in Average Order Value and take rate (commission charged by Zomato) will further add to the growth in Gross Order Value.
Online food delivery users are still a tiny portion of the total online users in India. For example, only 8% of the internet users in India use online food ordering v/s 53% and 38% in China and the US, respectively.
As a result of this under-penetration Indian online food delivery market is expected to post high growth in the coming years. Zomato has witnessed a ~4x jump in Gross Order Value from FY19 to FY22 and is expected to keep growing in the future as well. This growth in GOV was primarily driven by healthy growth in order volumes, while the average order value jumped from Rs. 282 in FY19 to Rs. 398 in FY22.
Although the Online Delivery business is still loss-making, Adjusted EBITDA has improved considerably over the last four years.
Note* Adjusted EBITDA = EBITDA (+) share payment expense (-) rental paid for the period as per ‘Ind AS 116 leases’
Hyperpure is Zomato’s farm-to-fork supplies offering for restaurants in India. Hyperpure supplies fruits and vegetables, groceries, dairy, poultry, meats and seafood, bakery items, gourmet and packaged foods, beverages, and packaging to its restaurant partners.
The company has invested in building infrastructure for the Hyperpure business over the past few years. This segment is seeing increased adoption by restaurant partners for its timely and high-quality B2B supplies. It believes that the Hyperpure business could become larger than its food delivery business because the addressable market is potentially massive.
Hyperpure has expanded its presence across 10 cities and 51000 unique restaurants as of March 2022.
The company kick-started its operations in 2019 and reported an exponential Revenue CAGR of ~230% between FY19 and FY22. Hyperpure’s annualized revenue run-rate is INR 16 bn with 9M Adj. EBITDA margin of -15%.
Quick Commerce Business:
Zomato recently acquired Blinkit to expand its presence in the quick commerce segment. Quick commerce is a natural extension of its food delivery business since it caters to customers’ needs to quickly deliver essentials and other products. In addition, it increases Zomato’s addressable market manifold allowing it to cross-leverage its existing customer base and hyperlocal delivery fleet.
That being said, Quick Commerce is still in its early days and is highly competitive. Moreover, investors were not sure of the incremental cash burn from Blinkit.
|Quick Commerce – Key Operating Metrics||Q1FY23||Q2FY23||Q3FY23|
|Monthly Transacting customers (mn)||2.2||2.6||3.1|
|GOV (INR bn)||11.72||14.82||17.49|
|Revenue (INR bn)||1.64||2.36||3.01|
|Adjusted EBITDA (as a % of GOV)||-27.8%||-17.5%||-13.0%|
Key Strengths of Zomato:
- Strong Network Effect: Like most internet businesses, Zomato has benefited immensely from the network effect. It focuses on a unique content strategy and a continuous rise in restaurant listings. This strategy feeds into the transaction funnel and creates a strong flywheel effect that leads to more customers, and more customers will lead to richer content.
- More customers on the platform would also increase the number of restaurant food orders, making more restaurants available for food delivery. More restaurants on its platform improve the choices available to its customers leading to growth in the number of customers. Zomato’s platform has seen customer stickiness and increased GOV by the customers over the years.
- Improving unit economics and growing at the same time: While Zomato’s business has grown rapidly, the unit economics of the food delivery business has also improved consistently. Zomato could be profitable in the next 2-3 years if this trend continues.
Zomato Financial Analysis
Zomato posted Adjusted Revenue of INR 23.63 bn in Q3FY23 as against INR 14.22 bn in Q3FY22, a y-o-y increase of 66%. This increase is partly also due to revenue coming in from the acquisition of Blinkit. It has grown its revenue consistently, as shown in the chart below. Currently, most of the revenue comes from Food Delivery, followed by Hyperpure and Quick Commerce.
Adjusted EBITDA for Q3FY23 came in at INR -2.65 bn as against INR -2.72 bn for the same quarter last year. Adjusted EBITDA as a % of Adjusted Revenue was -11% for Q3FY23 compared to -19% for Q3FY22.
As you can see below, the Adjusted EBITDA margin has improved significantly over the last few years as various segments have scaled up.
Zomato Share Price Analysis
From a market cap of over INR 1 Lakh Cr ($14 Bn) after its listing in July 2021, Zomato has lost over 50% of its market value. Its current market cap is INR 55K Cr ($6.8 Bn) as of 9th May 2023, down more than 60% YTD.
The stock has corrected on the back of valuation concerns and due to global tech stocks selloff. The stock also became the target of panic selling after the mandatory lock-in period for the pre-IPO anchor investors ended on July 2022.
Zomato’s shares also came under selling pressure after the company announced the acquisition of Blinkit, another loss-making firm, in June 2022.
Zomato Share Price Target Future Growth Potential
The food delivery business is still at a nascent stage in India with a long runway of growth. Increased penetration, higher order frequency, and higher AOV could drive strong growth for Zomato over the medium term.
Improvement in unit economics across various businesses (Food Delivery, Hyperpure, and Blinkit) will give better visibility of the path to profitability. It shall also be a huge trigger for any significant improvement in the stock price.
Reduction of competitive intensity on the quick commerce side (similar to what happened in the Food delivery market) can also help the company return to profitability faster than anticipated.
- Loss of market share to Swiggy: Swiggy continues to invest aggressively in growth, and a higher focus on becoming profitable could impact the market share of Zomato adversely.
- Quick commerce bet may not play out as expected: Quick commerce is a highly competitive space. Besides, it is difficult to rationalize the delivery fleet due to time constraints in quick commerce that hinders profitability.
- Macro challenges: Macro slowdown, higher inflation, higher interest rates, and lower liquidity could hurt the spending patterns and adversely impact Zomato.
Disclaimer Note: This article’s stocks and financials are for education only. They shouldn’t be considered as a recommendation by Research & Ranking. We will not be liable for any losses that may occur. The securities quoted, if any, are for illustration only and are not recommendatory.
Is Zomato overvalued?
Although Zomato is consistently growing its topline, it is still not profitable. The stock price has corrected over 60% from all-time highs post the IPO as the market felt the stock was overvalued. The company has improved its margins and is expected to turn profitable. Brokerage houses believe that it is a good play in the long run, but investors may need to optimize for their entry into this stock.
Is Zomato a safe stock to buy?
Experts believe Zomato is a promising company with a positive outlook. Given that the company is still burning cash, investors must closely evaluate the future performance of the company before investing. Investors should look for a certain margin of safety to protect their capital in this stock.
Who is the promoter of Zomato?
Zomato, in its red herring prospectus, has mentioned that it has no promoter and is a professionally run company.