Zomato IPO is not a buy and forget story

A much-awaited homegrown unicorn startup is knocking on the doors of D-Street for delivery of its IPO. The hunger for such tech-driven IPO is also high which shall ensure digestion of such fat sized IPO. The IPO of Zomato is remarkable as it would be the first listing of an internet-based startup. Zomato is a technology platform that connects customers, restaurant partners and delivery partners, serving their multiple needs. The majority of their revenue is generated from food delivery and related commission charged to their restaurant partners.

Financial performance

For FY2021, Zomato reported a loss of Rs 8,164 million which was reduced from Rs 23,856 million loss in FY20. Their monthly average users (MAU) and monthly transacting users (MTU) were 32.1 million and 6.8 million respectively. Their gross order value (GOV) for FY21 was Rs 94,828 million. The increase of average order value and reduction in discounts have decreased per-unit economics.

Valuations

The price band for the IPO is fixed at Rs 72-76 per share, at the upper band the valuation comes around Rs 59,623 crore. At such hefty valuations and despite incurring losses, Zomato is valued even more than some well-known listed giants.

Growth or profitability?

Despite posting hefty losses, such startup companies are valued very expensively. Such companies cannot be valued traditionally. Further, the company may keep posting losses as cash-burning is inevitable due to its disruptive nature of business. The ability to reach at the doorstep of any customer is a great strength that may open the doors of new business avenues in future. They are also planning to enter in grocery business so such expansions may prove to be a game-changer going ahead.

Disruptive business – a two-way sword

At present, Zomato operates under a largely duopoly market with Swiggy as its close competitor. Zomato will definitely get a first-mover advantage but one of the major threats going ahead is competition. Amazon has already started food delivery in selected cities. Customer loyalty cannot be expected in such a disruptive market as “disruption occurs in absence of loyalty”. The entry of deep-pocketed players may pose a serious threat to the business going ahead.

Invest and forget – not here?

From a short term point of view, Zomato may perform well on listing as there is a lot of zeal and fancy for such unique companies. However, in long term, we usually believe in ‘Invest and forget’ for wealth creation but this thought may not work here. For a longer-term view, we need to constantly track the company’s performance, acquisitions, expansions and whether the company is heading on the path of profitability on a continuous basis. If the company derails from the path, the essence will evaporate.

(The writer is the founder of Unlisted Arena, views expressed are personal)