Zomato’s IPO may be big but its financials present a very different story

Food delivery giant Zomato and its Initial Public Offering (IPO) came to a draw yesterday after being open three days for the bidding. The offer received bids for 2,751.25 equity shares against IPO size of 71.92 crore equity shares, The IPO was subscribed 38.5 times, led by institutional investors with a 52 times oversubscription of the part reserved for this segment. However, rather interestingly, the part reserved in the IPO for Zomato employees was under-subscribed. Of the 65 lakh shares earmarked for this group, 62% or a little over 40.5 lakh shares were taken by the employees.

There is no denying the fact that despite being a loss-making company, with no hopes of breaking even in the coming two three years, Zomato rode the hype train with inflated valuations. A Twitter user and investor named Anurag Singh posted a detailed and nuanced thread dissecting the reality of the bubble of the Zomato IPO which even ignited the curiosity of ‘Know nothing’ investors – a term coined by Warren Buffet.

The user pointed out that the current valuation of Zomato is Rs 66,000 crore or $ 8.8 BN USD. However, a year ago, when the pandemic had not struck the world, the food major’s valuation was $ 3.5 billion and that too after acquiring Uber Eats and its India services. It is imperative to note that Uber Eats has a 9.1 per cent stake in Zomato currently.

However, what appears rather quizzical is the fact that in a pandemic year when the average delivery order value fell from Rs 400 odd to Rs 238, the company managed to scale its valuation manifolds.

The company in its official filing has listed that covid lockdown impacted business which led to a decrease in revenue in FY21. While other online giants grew faster in the pandemic, Zomato shrank and to compound the problems, the average order size dropped. The netizen also pointed out that new restaurants enrolment didn’t increase much from 143k odd either, raising eyebrows if Zomato had hit a plateau.

Zomato has 42 million monthly active users but the netizen pointed out that out of it, only 52 per cent are from India while the rest come from outside the country. Up until today, Zomato hasn’t transparently answered whether its expansion drive is being fuelled by the domestic market or vice versa.

Moreover, the company changed its revenue recognition method midway. Earlier, Zomato counted delivery charges as revenue & netted off the discounts. Since Oct 2019, it converted to a “pure tech platform provider”.

“Until October 28, 2019, we recognized delivery charges collected from customers as revenue and netted discounts given to customers from revenue on a transaction by transaction basis, only to the extent of customer delivery charges recognized for the transaction. Since October 29, 2019, we merely act as a technology platform provider for delivery partners” read the change in policy.

Zomato rather coyly also hid comparison with any other peer company of its industry by stating, “There are no listed companies in India whose business portfolio is comparable with that of our business and comparable to our scale of operations,”

Lastly, the user made a comparison with American food delivery giant DoorDash and explained how valuations were astronomical in the case of Zomato that rose from $3.3 billion to $8.6 billion in the span of 18 months only.

While it is great that an Indian start-up has taken baby steps to play in the big leagues but it needs to keep expectations in check and avoid the trap of inflating valuation. While most investors would have put in their capital for the listing gains, it will be interesting to observe if the company provides handsome returns or bombs like Burger King IPO.