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Zomato (English Video)

Updated: Apr 14, 2022


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With a share price of Rupees 155, and a market cap of around Rupees 1 lakh twenty thousand crore, Zomato is certainly an interesting case for any investor to look at.

What is Zomato’s business?

Zomato is a technology platform connecting customers, restaurant partners and delivery partners, serving food delivery or restaurant industry.

Now you may be wondering why the IPO? To put it candidly by the management,

The IPO decision was a desperate contingency plan because we didn't have any other choice, honestly! Company had 6 months of money left in the bank.

Ok. Zomato has got our attention – desperate IPO that has doubled in less than 6 months!

India’s food delivery sector, currently at USD 3.5 billion, is expected to grow at a CAGR of 25 to 30% rate over the next 5 years driven by changing consumer behavior with reduced dependence on home-cooked food and increasing consumer disposable income. Even with a growth rate this attractive, the focus of investors on the story should reduce, financial & operating performance should start to matter for the company.

But, Zomato has taken a stance – “We are adamant that we will not let our IPO change anything, and we aren’t going to morph into a ‘Quarter-se-Quarter-tak’) business.” It does still leave the question of how to invest and to hold the company’s shares, especially in the absence of operational metrics on a regular basis.

So should one invest in Zomato? Well, let’s dig deeper.

Company adjusted EBITDA has come down further to a bigger loss of INR 310 crore in second quarter fiscal year 2022 due to:

  • Reduction in Food delivery contribution margin,

  • Higher employee cost, and

  • An increase in marketing spending.

Food delivery business contributed to c. 88% of Zomato revenue. Understanding operating metrics of the food delivery business is key to understanding Zomato’s performance trajectory.

In the second quarter of fiscal year 2022, operating metrics, as derived by us, of food delivery business:

  • the average monthly users have risen significantly in comparison to the last 2 years

  • Contribution margins per order however, are down from 21 rupees to just 5, primarily due to higher delivery costs and higher fuel costs

  • On the bright side, Zomato has been able to maintain a high average order value even after India’s economy suffered a downfall due to covid.

Operating metrics do not seem to be improving. Some of these elements may not be temporary. Hence, profitability is still quite a few years’ away for the Company based on these operating metrics.

So, what is my view on company valuation?

Zomato currently trades at a valuation of more than 20 times last quarter annualized revenue.

As the brand is well-known, there will always be investor interest in the Company, so till we get Swiggy or some other similarly well-known player listed, Zomato will stay in the conversation of investors.

Should you invest in it?

  • Still losing money with operating margins shrinking.

  • Valuation is 20 times revenue (Phew! that’s rich)

Will the growth story ever result in positive cash flow? Fortune teller ka phone number kya hai?



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