In this week's FinMail, we will look at one of the most hyped IPOs of the year. you already know the name, don't you? We will explore the question - What is it in this IPO that seasoned Investors are ready to invest?
And the IPO season is back and this time it is even more generous as we are witnessing internet companies & start-ups preparing to go public. One of the most awaited IPOs of the year is all set to hit the market on the 14th of July with an IPO size of ₹9375 crores. But wait, what's so special about this IPO? Aren't IPOs a common thing?
In that case, let us remind you that it's a loss-making company, despite the fact company is raising such huge capital from the public. So how exactly the company is planning to net out all these losses and turn around? Worry not, today we are going to simplify the same. Take a bite and get ready.
SEBI's guidelines to conduct a public issue:
SEBI has laid down some entry norms for protecting the investors from entities raising funds from the public i.e conducting IPO. One of those norms is that company needs to be profitable. Zomato, as we know, does not fulfill the criteria. Well in that case to provide enough flexibility to ensure that genuine companies are not limited from fundraising and that the "Startup Culture" gets a needed push, SEBI has provided companies with another option.
The norm states that 75% of the net public issue should be mandatorily allotted to Qualified Institutional Buyers (QIB). And the rest could be divided between the Retail quota and HNI quota.
So in Zomato's case too, only 10% of the quota is reserved for Retail Investors.
But why even invest in Loss Making Companies?
Zomato is raising ₹9375 Crores out of which only ₹375 Crores will be used to pay existing investors (Info Edge and that too a little proportion) and ₹9000 Crores would be raised for fresh purposes. So clearly the existing investors don't want to exit the company and if existing investors are staying invested in the company, they are expecting that at one point in time company will achieve enough market share and generate free cash flows. But what is the outlook that we are missing? We are just going to deliver (pun) that today.
Cash Burn Strategy:
PayTM & other companies like PayTM enabled us to do our phone recharge and pay our electricity bills directly from our bank accounts via cards, and they used to provide us attractive cashback offers on doing the same. Now if you see, these cashback offers aren't there anymore :( but surely many of us are still using their platforms for paying our bills. Well, that happened due to irreversible habitual change. We became habitual to pay our bills via its platform, and it would be so silly of us if we start standing in a queue just to pay our electricity bills. PayTM sold us the comfort of paying bills and recharges from our homes and we sure are loving it.
If you notice, that's what almost every startup company tries to achieve and it takes years and sometimes decades to bring that 'irreversible habitual change', and for that time being company needs to reward their users to continue to use their service (customer retention 101). And doing exactly the same while making sure that their customer user base grows is a heavy task to pull off and requires lots & lots of money and that too for a consistent amount of time. Hence, it is often termed as 'cash burn' (literally burning the cash).
And every other startup company follows the pattern, you name it. Ola, PayTM, Amazon, Oyo, BigBasket, Delhivery, PolicyBazar, etc.
Yeah, cash-burning is normal for a startup and Investors do pump in more money if they see the potential (at least in theory). But what about Zomato? Where exactly Zomato will be profiting? The company has tried and failed several times in steering the company towards different cash flow streams. Be it Zomato Gold or other such paid membership programs.
But what is it in Zomato that Investors are ready to invest in it? Are we missing something here?
Looking into Zomato:
What does a traditional Retail Investor see in Zomato?
Zomato is a Food Tech Company that is operating for almost 15 years. The company's core business to deliver food from the restaurants to its users (customers). Just like any other tech company, it has the data, of its users as well as restaurants on its platform. It would probably make some use of the data, maybe even sell it to other restaurants to help them achieve maximum efficiency and make more money. Once users get habituated it would increase the fees and start earning profits. The company's revenue has gone up from ₹13,977 Million (2019) to ₹27,427 Million in 2020 and ₹21,184 Million in 2021. The losses too have gone up from ₹10,105 Million in 2019 to ₹23,856 Million in 2020 and further to ₹8,164 Million in 2021. The losses are huge considering the popularity of the Zomato among youth (undeniable) and the large user base that it has created. It would be difficult (financially) to sustain further in the future.
Common Point of View:
Zomato does have the user data but it is difficult to attach a monetary value to it (as of now) and it is difficult to think how much the data would have to work for Zomato in their favor to make them a profitable company. Data is valuable, right? But the use of it is limited to some extent. How will the data help Zomato to become profitable in the future? The only way Zomato can sustain is to increase its charges and hope that users will keep using Zomato after the charge hikes.
But while studying about it, we found something that could turn Zomato into a Gold mine. We understood why Zomato has backing from Institutional Investors and what do they see in Zomato that we don't?
Looking beyond the current Zomato from the eyes of Institutional Investor:
So is that it? That's what Zomato is, right? Well, it is, right now. So let's look at what it can be, in the future.
Zomato processed about 403.1 Million orders in 2020 and 238.9 Million in 2021 on their platform and it had a monthly average user base of about 41.5 Million (2020) and 32.1 Million (2021). Zomato has all the relevant data about its users and also the data of the restaurants that are on its platform. Using the data, Zomato can easily find out which food or dish is being preferred by people in any particular geography. It can also analyze which dish is the best selling at a particular time of the year. So basically, if Zomato had to find out which dish would sell the most in a particular location of a city during Summer and what should be the optimal price and quantity of that dish, it would be an achievable task for Zomato.
Zomato sits on a data mine which if used correctly, can turn Zomato from a loss-making company to a cash-minting company within a few time. For instance, Zomato is already using the data it has to help new restaurants launch their food service. Zomato basically advises them about the demographics and profitability of the food and charges a fee for the same. If you might know about Ekdum Biryani, (A venture of Jubilant Foodworks) Zomato was the one with whom they consulted before starting it. Okay so this does seem a profitable way to make money out of the data, but is this the only way that Zomato can earn? Probably no.
It's not just about sitting on a data mine, but more about using it effectively. Lately, the cloud kitchen concept is taking out business from restaurants & regular food chain stores. If you're new to the concept of Cloud kitchen, you're missing a 'revolution' taking place in the Food Tech industry.
Cloud Kitchen Revolution:
The online food delivery system has given a birth to a new revolution in the food industry and that is Cloud Kitchen. Well, Cloud Kitchens are not kitchens that are on cloud. (somethings are not so obvious) But they sure are "un-dinable"
Cloud Kitchens/Ghost Kitchens are restaurants that process only takeaway or delivery-based orders. The traditional "dine-in" option is not available in such restaurants. And basically that is it. Such kitchens are efficient to operate, financially and as well as in terms of time consumption. Restaurants don't need to invest in a "place" and make it more ambient and the only thing that is needed to take care of is food. The initial investment and the cost of running a cloud kitchen could be brought down to as low as 1/3rd of a regular restaurant. You can cut a whole lot of cost in rents, ambiance, employee cost, maintainence, etc. Basically, you can run a cloud kitchen from your home and no one would mind, as long as the food is delicious. Best example? Fasoos and Behrouz Biryani. Yup! They don't have any restaurants and only operate to fulfill delivery or take away orders.
Okay but where does Zomato stand in the picture here?
Cloud Kitchens? okay fine. But Zomato? How are they even related. Let us tell you Zomato's other business that is not in the lime light - Zomato Kitchens. Zomato Kitchens is nothing but Zomato's venture into cloud kitchens. Consider the data Zomato has about the users and the restaurants and the things it can do with it (we already looked it above) Zomato can use the data to give consultation to upcoming restaurants. But what if Zomato isss the upcoming restaurant? (see that coming?) Zomato Kitchens will use the data from its parent company to optimise its operations throughout the country. The data would be an absolute gold mine for Zomato's Cloud Kitchens to optimise their profitability at peak. Like absolute efficient. Zomato can then undercut all the restaurants it has on its platform by keeping the price competitive and pushing its restaurant before others because it's their Platform obviously. Basically, it can do what Amazon does on its own platform.
But that's just not it. Enter into the Zomato's next business - Zomato Hyperpure. Hyperpure is Zomato's farm to restaurant supply venture that provides restaurants with fresh, hygenic, and quality ingredients directly from farms, mills, and producers. This supply of ingredients include dairy, vegetables, groceries, poultry, meats, seafood, bakery items, packaged foods etc. Basically, every raw material. Hyperpure is a service that is available for all the restaurants that are listed on Zomato.
Are you joining the dots?
Zomato's data 🤝 Zomato Kitchen 🤝 Zomato Hyperpure. Just imagine what beast it can be and how much competitive prices Zomato can keep with all the resources it has. Absolute bongers! That's not it but we sure are done discussing Zomato's business model and "What it can be" in the future. Now let's fit Zomato into the demographics of India.
India is a young country where the median age of population is just 28 years compared to 38 in China & US, 43 in Western Europe and 48 in Japan. And today, 54.6% of India's population is in the workforce age bracket of 20 years to 59 years.
The World Bank estimates nearly 35% of India's population (47 crore) resides in Urban areas in 2020 which is likely to increase to 38% by 2025.
Plus, internet and smartphone penetration in India has more than doubled from 310-330 million internet users in 2015 to 660-690 million users in 2020 and is increasing further.
Zomato hopes that while Food Services in India is highly under-penetrated, it is likely to grow steadily, taking share away from homecooked food as has been the trend in the past as well. Growth will be driven by changing consumer behavior, reduced dependence of millennials on home-cooked food/kitchen set-up, increasing consumer disposable income and spendings, and higher adoption among the smaller cities.
So basically, Zomato along with Swiggy & other such companies would be riding this behavioural change that India is to witness in upcoming few years. And as we know, investment is all about discounting the future. The future - which can only be predicted (by analysing the current scenarios).
And that is what brings us all the different perspectives on the table. According to some it is just a loss making machine and if you're Investing into it, you're providing your money to the company to burn. While some see it as a gold mine, where company is yet to or is near to achieve its gold reserves. To sum it up, basically, it's a tug of war between the Investors looking at the current Zomato and the Investors believing in what it can be. But, one thing is for sure that this would turn up as an interesting case study in the world of startups. As Zomato's listing would mark a first new-age tech Startup listing honour. With India lined up to witness more IPOs like PayTM, Delhivery, PolicyBazaar, etc it is surely going to be a journey to witness.
Where do you see Zomato and like companies in the future? Tell us using our twitter handle @yourfinman.
That is it for this week's FinMail. Keep learning and stay hungry and also safe.
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