Zomato Ltd IPO

Key Points of Zomato:

Choice between sensible growth vs. profitable growth: 
While food delivery companies have historically focused on hyper growth with little focus on profitability, pandemic has shown that such business models can generate profitability on unit economics basis. We expect Zomato to sustain focus on growth, albeit also be prudent about margins. We believe the food delivery market has not yet reached the stage when companies can start thinking about profitability at the expense of growth. 

Creating a food super app or the Indian Meituan? 
With its delivery and dine-out businesses, Zomato is probably the only scaled up app that has offerings that match those of Yelp, DoorDash and OpenTable in a single app. Further, through its B2B supply business, Hyperpure, and potential foray into B2C grocery through Grofers, it is metamorphosing into a food-tech super app catering to a large part of the consumer food chain. With US$2bn in cash post its IPO, Zomato may focus on international expansion in the long term, while venturing into Meituan’s model of offering travel & other services may be tried too.

No room for a third player, strong enough entry barriers: 
Zomato and Swiggy have both raised more than US$4.5bn till date, to reach their current scale. Some players such as Food Panda and Uber Eats, with expertise in food delivery, have already exited the Indian market. We believe the food delivery business cannot be built as an adjacency to another horizontal play and requires razor-sharp focus to drive returns. Hence, any threat from a third, well-funded player is low. Also, a new player would have to compete with existing offerings and differentiate on factors other than pricing, for building a sustainable base.  

Risks:

• The company has a history of net losses and expects bigger expenses in the future.
• The COVID-19 pandemic, or a similar public health threat, has had an impact and could further impact the business and financial performance of the company.
• Failing to retain existing restaurant partners, customers or delivery partners or failing to add new restaurant partners, delivery partners or customers, may have an adverse impact on the business.