Zomato's Rs 8,250-crore IPO can deliver boost to consumption sector

Projections suggest online food delivery market should grow to $22 billion by 2025

There are several interesting aspects to the listing of food delivery start-up Zomato, which filed for its initial public offering (IPO) on Wednesday.
 
First, It’s a big issue, targeting to raise Rs 8,250 crore ($1.1 billion), including the sale of Rs 750 crore worth of stake from early investor Info Edge.
 
This could provide a boost to the start-up sector and inspire other companies in this space to tap the IPO market. Start-ups such as Policybazaar, Nykaa, Delhivery, and MobiKwik are all rumoured to be planning their IPOs this financial year. Listings such as IndiaMart, and Infibeam have sent positive signals, and the market is ruling high.
 
Second, Zomato has only one competitor in India — Swiggy. If we go by the last round of funding in which Zomato raised $250 million, it has a valuation in the $5.4 billion-range. The listing should push that up — market watchers are speaking of a target valuation in the $8-9 billion range. Price discovery here will be interesting.
 

In business terms, a successful IPO could boost business for the 350,000 restaurants listed on the app, including the 130,000 restaurants that actively deliver.
 
Zomato claims over 161,000 delivery partners too. It intends to use the funding to expand, which means it could list more businesses and expand the market, while it expects an increase in expenses. 
 
The pandemic may actually have accelerated the trend of online booking and home delivery in the food business.
 
While food consumption overall accounts for $670 billion (about 25 per cent of the GDP), the food services business is estimated at about $80 billion and roughly half is not organised. Online penetration today stands at 7-8 per cent.
 
Projections suggest the online food delivery market should grow to $22 billion by 2025 — that’s roughly 20 per cent of the estimated 2025 market, if it can maintain a 40 per cent CAGR. Growing internet penetration and willingness of users to order online are two factors that could drive this business. 
 
Zomato’s business model, as stated by the company, is as follows: “Our technology platform connects customers, restaurant partners and delivery partners, serving their multiple needs. Customers use our platform to search/discover restaurants, read/write reviews, and upload photos, order food, book tables and make payments while dining-out. We provide restaurant partners with marketing tools to acquire customers. We also operate Hyperpure, wherein we supply ingredients and kitchen products to restaurant partners. We provide our delivery partners earning opportunities. Our mobile application is the most downloaded food and drinks application in India in each of the last three years.”
 
In the nine months from April-December 2020, Zomato declared $183.6 million in revenues, while losses stood at $91.8 million. That burn rate has to come down eventually to make it commercially viable as opposed to popular.
 
Losses for start-ups are not uncommon, but Zomato has been in operation for 11-12 years. Investors will have to balance that off against the trend of high valuations for start-ups, and online plays in particular.