First Peek At Indian Unicorn Zomato’s Key Financial Ratios Ahead Of Its IPO

Food delivery firm Zomato Ltd has filed a draft red herring prospectus (DRHP) for an initial public offering (IPO) of
its shares, enabling a closer look at its financial performance.

 Most global food delivery businesses have reported a boost in business post-covid. In the case of Zomato, gross order
value in the December 2020 quarter has only about inched back to pre-pandemic levels. But the good news for its
investors is that the contribution margin has turned positive.

 In the first nine months of financial year 2021 (9MFY21), Zomato reported a contribution margin of Rs22.9 per order,
compared with a loss of Rs30.5 per order in FY20. This excludes costs associated with marketing, branding and other
fixed operating costs. Still, the contribution margin had been on the mend even before the pandemic, and has turned
positive since the first quarter of FY21.

 The vast improvement in unit economics will be a key factor used in promoting the IPO, although investors should
note that some of the benefits to the food delivery business post-covid may not sustain. Already the contribution
margin has tapered a bit in Q3, falling by a third, compared with Q2 levels.

While the company hasn’t provided a quarterly break-up of its results, a comparison of unit economics of 9MFY21
and fiscal 2020 shows that the improvement in profitability was driven by higher fees and lower discounts.

 Average order value rose over 40% to nearly Rs400, driving an increase in commission earned on a per order basis.
The company also increased delivery charges billed to customers. In FY20, only 30% of actual delivery costs were 
billed to customers. This was increased to 60% in FY21. Another major saving came in the form of lower discounts.
On a per order basis, discounts were cut to merely a third of FY20 levels.

 While Zomato did well on costs, it hasn’t seen the rapid growth reported by some global firms such as Doordash.
Gross order value stood at Rs2,981 crore in the December 2020 quarter, up 7% year-on-year. In the case of Doordash,
which had a blockbuster IPO last year, revenues had more than trebled in the December 2020 quarter.

 The US firm’s losses have also magnified, showing that Zomato has preferred a cautious approach, with the main
focus being on unit economics. Total orders received by the Indian firm were still 23% lower in the December quarter
compared with pre-pandemic levels.

 This is surprising, as it was felt that restrictions on eating out had led to an increase in food delivery orders. Higher
delivery fees and lower discounts could partly be blamed for the drop in the number of orders. In other words,
discounts will still play a big role for driving growth.

 In this regard, Zomato appears to be well placed in terms of its cash position. In FY20, it had a cash balance of just
Rs500 crore or so. This has risen to around Rs6,700 crore after large fundraising rounds ahead of the IPO, besides
which another Rs7,500 crore will be raised through the IPO.

 While cash burn has reduced meaningfully in 9MFY21 to Rs272 crore (versus Rs2,165 crore in FY20), the high cash
balance may well prompt another round of discounting to drive growth. The fact that a number of private equity
investors are staying put and aren’t selling in the IPO suggests they are in for the long haul as well.

 Info Edge (India) Ltd is the only selling shareholder in the IPO, and isn’t exactly cashing out. It will be selling only
around 10% of its holding for Rs750 crore. Its cost of acquisition on a per share basis was merely Rs1.16, and the last
round of fundraising in February pegged the firm’s value at Rs58.2 per share. At Zomato’s most recent valuation, Info
Edge will stay invested with a stake valued as high as Rs6,500 crore.

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