Zomato IPO will test Indian investors' unicorn appetite: Analyst's note

Company faces competition in a food services market that is yet to reach global scale.

Zomato’s initial public offering will test Indian investors’ appetite for unicorns, as the food delivery aggregator operates in a competitive market, said a note by Anand Rathi Research.

 

Food consumption in India was about $670 billion in 2019--driven by home-cooked food. Food services, defined as non-home-cooked food or restaurant food, contribute around 10 per cent to the consumption market. This is lower than the United States and China where food services contribute about 54 per cent and about 58 per cent of total consumption.

 

“In FY20, Zomato generated marketplace gross order value of about $1.54 billion, around 2.3 per cent of the market and we believe that the company is in the early phases of broad market adoption,” said research analyst Shobit Singhal in the note.

 

The note comes after Zomato filed its draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (Sebi) on April 28, taking the first step towards becoming a public company.

 

The proposal to raise Rs 8,250 crore, or over $1.1 billion, through its initial public offering (IPO) makes this one of the largest by a consumer internet company in India.

 

Singhal said the cost to switch between similar food delivery offerings was low, and the entry of technology giant Amazon in the food delivery business could threaten the duopoly of Zomato and Swiggy, who together have a 90 per cent market share in food delivery in India.

 

“Amazon, which started its food delivery service, Amazon Food, in Bengaluru last year in four zip codes, has expanded to 62 zip codes now. Food delivery is free to its prime members. Even as it is limited to one key market in India, Amazon Food is vigorously trying to undercut competition,” Singhal said.

 

Zomato said in its IPO prospectus it expected to use Rs 5,625 crore from the net proceeds to fund its organic and inorganic growth, which includes customer and user acquisition, delivery and technology infrastructure, and acquisitions.

 

Singhal’s research note said Zomato’s initial plan to expand into international markets like the UK, Dubai, Philippines, Qatar and many other countries did not work out.

 

“It had a two- pronged approach: launch its own product and buy out the competition. This did not work out and it wrote off its overseas investments. Now it has decided to focus only on the India market,” it said.