Thread by @theBuoyantMan

I was taking notes on Zomato as they have filed their DRHP with SEBI for an IPO this year or next.

"But, but Shravan, it's a loss making company. Who would bother to invest in its IPO?"

I hear you. Let's objectively look at Zomato.

Time for a thread 👇👇👇

1/ Surely there must be a frenzy for getting Zomato's shares.

Before doing that though, let's take a walk back Zomato's memory lane.

Deepinder Goyal and Chaddah, both IIT graduates, started Foodiebay in 2008, while working as analysts at Bain and Company.

2/ It was started as a predominantly food reviews and rating company.

Within 9 months of its launch, FoodieBay became the largest restaurant directory in Delhi NCR.

3/ In 2010, the company was rebranded as Zomato

- due to the original name mimicking eBay

and

- since the founding team also wanted to expand to other verticals, and did not want a conflict in branding.

4/ In 2012, the company started going after overseas operations and established presence in several countries.

Between 2012 to 2014, they launched operations in
countries like UAE, Canada, Indonesia, Philippines, etc.

5/ Having their focus spread out across different countries and managing operations there, they started losing focus at home, and burnt a lot of cash.

To cut their losses, they laid off about 300 employees (about 10% of their headcount at that time) back in 2015.

6/ Between 2015-2017, they also

- cut down operations in few countries overseas
- made most of their operations remotely driven
- started focusing on more revenue-generating areas like reservations that were lucrative for them.

7/ Since then, they have established different streams of income:

- Reservations
- Deliveries
- Hyperlocal supplies for restaurants
- Cloud Kitchen

and few other streams.

Their efforts have been into becoming an end to end, full-stack brand for food.

8/ Currently Zomato has presence across

- 526 cities in India
- more than 350,000 active restaurant listings

as of Dec 2020, including its presence in 23 foreign countries.

9/ Coming to the business model, Zomato's streamlined model is three fold.

i) Zomato as a matchmaker - matching a person looking for a restaurant with a restaurant willing to serve a customer looking for a restaurant.

(Products: Zomato Gold, Piggy Bank, Cloud Kitchen)

ii) Zomato as a content aggregator - with reviews, photos, menus of restaurants across the locations it has listings in, all curated by general public, refined by Zomato's content team.

This puts Zomato on top of the Google SEO kingdom, and creates a lead magnet feedback loop.

iii) Zomato as a certifying authority:

Zomato's Hyperpure supplies groceries and raw materials to the restaurant partners with decent enough credit facilities.

Through this, they tighten the quality control of food from source to plate.

Generally, Zomato makes money through the following routes majorly.

- By linking customers and restaurants
- Restaurants pay for advertising
- Subscription by users for delivery and Gold

Outside of these, they earn through the following models as well.

- Consulting for restaurants and partners through the massive data they acquire from/of users
- Zomato Whitelabel - helps restaurants build their app through plug and play
- Ticket sales for events in restaurants.

10/ While it has achieved all this in a span of a decade, it has faced a fair share of controversies.

In August 2019, restaurants across India launched a #logout campaign.

Zomato was eating into their margins through Gold and Infinity dining feature. Restaurants responded.

The restaurant association of India highlighted issues such as “unreasonably high commissions, payment terms and arbitrarily applied additional charges” that restaurants have been charged to be a part of Zomato Gold.

It simply wasn't sustainable for restaurants to do it.

11/ Despite facing these issues, Zomato claimed to have registered an increase of 177% of restaurant partners after getting an additional 73K restaurants on board.

The controversial Zomato Gold service has registered a 180% increase with 1.4 Mn users.

12/ For the IPO, Zomato's major shareholder currently (Naukri) will be offloading Rs. 750 crores worth of shares in the IPO.

Zomato will be raising 7500 crores from the IPO.

In total, this is a Rs. 8,250 crore issue.

13/ Zomato has grown 7x since 2018 compared to the 3.6x growth of the overall food delivery industry (also aided by the acquisition of UberEats). But, can this growth continue?

According to Redseer analysis, Online food delivery market in China is a $100 Billion market while the equivalent in India is only about $6 billion.

Also, China has over 500 million online food delivery users while India has only about 70 million users onboarded so far.

14/ This figure is set to grow and Zomato is going to fight it out with Swiggy in a winner takes all battle over the next decade.

Back in 2017-19 when Zomato was making 7.5M monthly orders, Swiggy was doing 11 Million. It has only grown neck-to-neck now.

Swiggy is a logistics company that has perfected delivering externally cooked food as a use case, and this infrastructure could be flexed for other fresh products (groceries, vegetables/fruits, and so on).

Zomato faces stiff competition from Swiggy nevertheless.

15/ Recently, Zomato has achieved positive unit economics, with a contribution margin of INR 22.9 per order on average till Q3 of FY21.

In comparison, it used to be INR -30.5 for FY20.

This means that Zomato is actually making money on a per order basis instead of burning cash.

Increased restaurant commissions, ad revenues, delivery fees - all of these have contributed to the unit economics turning positive.

16/ With InfoEdge liquidating its stake, Uber will become the largest stakeholder in Zomato.

Other than Uber, the primary stakeholders were Alipay, ANT group who Zomato has given partial exit to because of China related reasons.

Deepinder Goyal continues to retain 5.51% stake.

17/ The money raised will go to

- organic as well as inorganic growth initiatives
- fund their delivery and technology infrastructure improvements
- customer and user acquisition and retention
- acquiring companies that further Zomato's vision

18/ The company nevertheless is still a loss making company like most of the unicorns in India.

But the potential that's held by the market in which Zomato operates is immense.

Set to grow 10-15x over the next decade, Zomato will be a major benefactor.

19/ Also, Zomato has put structural advantages in place by attacking the problems in the food-industry from multiple angles (from farm to plate to door - from Zomato to Delivery to Hyperpure).

This in combination with the efforts to become a full-stack food company puts Zomato at a unique advantageous position that it is a company to watch out for, in the listed space.

20/ There is definitely going to be an expected cash burn to continue, but as the unit economics grow, the company's topline will eventually do so too.

The major threats to Zomato in the next decade will be Amazon and Swiggy.

With Amazon Prime, Swiggy, Flipkart Fresh, etc., kind of deep pocketed incumbents, how Zomato tackles the challenges while becoming profitable is going to be a hard task.

That said, Zomato is ten steps forward in that journey.

If they improve their growth, who's to say that they won't dominate the market.

But it's a BIG "if".

The IPO may lead to listing gains due to frenzy, but I'm quite sure that the shares will be available at a better price after the IPO.

As always, it's better to accumulate in a systematic fashion if you are convinced of the company's future and potential to play out as expected (which rarely happens).

Study the DRHP filed with SEBI and take your call.

I'd personally avoid subscribing to the IPO.