The brokerage firm said that Zomato is placed in a sweet spot as the online food delivery market is at the cusp of evolution. It enjoys a couple of moats and with the economics of scale started playing out, the losses have reduced substantially. However, predicting the growth trajectory at this juncture is a little tricky for the next few years. The valuation also appears expensive at 25x FY21 EV/Sales compared to an average of 9.6x for global peers and 11.6x for Indian QSRs. Though, valuing such early-stage businesses on a plain vanilla financial matrix might not give the right picture and may look distorted. Investors with a high-risk appetite can subscribe for listing gains given fancy for unique and first-of-its-kind listing in the food delivery business.
Zomato’s IPO will improve its cash levels to Rs 15,000 crore, which will serve as currency for M&A, investments in tech & customer acquisitions, and general corporate purposes. This cash pile should easily help sustain burn rates for a good 7-9 years. At the upper price band, Zomato’s valuation of 5.1X FY24 EV/Sales may appear optically demanding. However, given the fledgling nature of the business, duopoly market, immense upside penetration potential, the humongous untapped online opportunity of the adjacent verticals, and scarcity of premium, the research firm has recommended subscribing for listing gains
Zomato is looking to invest in new products, technologies, and features for the benefit of its customers. For example, Zomato is in the process of rolling out a grocery delivery marketplace on its platform on a pilot basis. Food Services is a competitive market in India comprising food delivery players like Zomato and Swiggy, cloud kitchens like Rebel Foods, and branded Food Services players (including quick-service restaurants like Dominos, McDonald’s, and Pizza Hut, among others). Food delivery players also compete with multiple other participants in the Food Services industry including restaurants that own and operate their own delivery fleets, traditional offline ordering channels, such as take-out offerings and phone-based ordering, local publications, and other media, online and offline.
Zomato builds relationships with restaurant partners through their offline on-field sales force. They enter into legally binding agreements with restaurant partners who elect to purchase their services, such as advertisement, food delivery, Hyper purity, among others. The creation of listings on their platform is free of charge. The end-to-end Food Services approach makes Zomato the most unique Food Services platform globally combining the offerings of platforms such as Yelp, DoorDash, and OpenTable in a single mobile app. Food delivery is highly complex as food is a highly perishable commodity, which requires careful handling while maintaining high levels of hygiene and real-time on-demand service. The company’s precise and real-time, demand forecasting, fleet optimization, and intelligent dispatch technology optimizes the matching of orders and delivery partners using machine learning.