The non-obvious takeaways from Zomato's IPO prospectus

The pandemic was meant to be boom time for food delivery giant Zomato. However, while average order value has spiked and contribution margins have turned positive, a closer look at the numbers reveals a company with falling revenue, shaky unit economics, and no clear path to profitability. Could Zomato's public listing dream turn into a nightmare?

Zomato recently filed its draft red herring prospectus in anticipation of a $1.1 billion listing on India's bourses later this year

While the company now boasts a healthier average order value and contribution margin, revenue and users have dropped

Zomato's US-based peer DoorDash, was valued at a revenue multiple of 17X. A similar multiple would peg Zomato below its current valuation of $5.4 billion

Its decision to list in India rather than overseas might have a lot to do with these shaky foundations

Last week, food delivery startup Zomato filed filed Sebi Zomato Limited - DRHP Read more its Draft Red Herring Prospectus (DRHP) as a precursor to an Initial Public Offering IPO) in India. The company is said to be tendering shares worth $1.1 billion (Rs 8,250 crore), which includes a primary issue of $1 billion and secondary shares of $100 million.

In February, Zomato had raised $250 million in funding at a post-money valuation of $5.4 billion.

A media report report BloombergQuint Why Zomato May Be Looking At IPO Valuation Of At Least $6.4 Billion Read more quoted an analyst who opined that Zomato may be “looking at an IPO valuation of at least $6.4 billion”. Considering the fact that $6.4 billion is the arithmetic sum of the previous valuation of $5.4 billion and $1 billion in new primary funding, one hopes that this analysis was not the aforementioned analyst’s day job.

Jokes apart, it would come as no surprise if Zomato’s management and investors will be hoping for a valuation that is meaningfully higher than that of the last private funding round and will eventually get it to the coveted decacorn valuation milestone of $10 billion. This would make Zomato the highest valued foodtech startup in India and one of the highest valued Indian startups in general.

There is one impediment to this decacorn dream. Unlike private markets, the public market values companies on numbers rather than narratives. Metrics around profitability, growth, and free cash flows are critical. These aren’t necessarily Zomato’s greatest strengths. Zomato declined to respond to a detailed questionnaire sent by The Ken.

So how does Zomato measure up when it comes to these metrics? What else does the prospectus tell us about Zomato and the market? What are the other imperatives and challenges for Zomato around its public listing?

Let’s take a look.

Pandemic pop?

There is a school of thought that posits that now is the “best time” for Zomato to go public. The main driver for this bullishness is a belief that the pandemic has turned out to be a great tailwind for the company. Like many other e-commerce companies worldwide, the dynamics around work from home and general trepidation around venturing out should be a boost for Zomato’s food delivery business.

This argument is largely made on the unit economics figures that the company has published.

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There are two aspects highlighted here.

First, the AOV, or Average Order Value, has risen sharply post the pandemic.

AUTHOR

Sumanth Raghavendra

Sumanth is a serial entrepreneur with more than eighteen years experience in running startups. He is currently the founder of Deck App Technologies, a Bangalore-based startup attempting to re-imagine productivity software for the Post-PC era. Sumanth’s columns appear regularly in leading publications. He holds MBA degrees from the Indian Institute of Management, Bangalore and Thunderbird, The American Graduate School of International Management, USA.

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