About Me
Bhavik Mehta - I have been following the Indian public equities for the past 12 years and like to maintain a watchlist of stocks to follow.
Currently I am part of the investment team at Roots Ventures, all opinions on these posts are personal but it is safe to assume I or my colleagues might have personal investments in the stocks discussed. This is an information blog, do your own DD!
In light of the DeFi revolution, there is an NFT of this post getting Mined…..(More on it in the next post :D )
Ever since Zomato’s DRHP filing, there have been multiple notes, blogs, articles with great insights on Zomato’s business but at the same time ravaging skepticism on valuation, churn, lower TAM than our imagination. Most of these do a block approach of Revenue/User/Valuation comparison to Global companies which seems like the most logical when there is no domestic peer. Even my own thought process flowed in that direction, only to realise much later it was primarily academic to go that route and I scrapped the entire post to rewrite this one.
Zomato History-
The company has raised approx. $1.8 bn till date. Having started as a discovery platform in 2010 (co formed in 2008), it was quick to realise the change in market dynamics with Swiggy’s fast paced growth in 2014-15, and inspite of initial reluctance it moved to food delivery in 2015 and since then battling it out with Swiggy and although they would say they have a higher market share than Swiggy, it seems like an equal duopoly with only a single external threat with Amazon launching the food delivery business and Dunzo still not as prominent in terms of food delivery. All possible international experiments are also completed and now is extremely focused to keep its both wheels in India!
Read few Articles/posts that it is a global company and huge market, but reality is they love only India-
Funding Round History-
If we observe Info Edge primarily took a bet on the discovery platform but as on today 90% revenue comes from delivery business in India. That said shows the power of a digital brand with active users, there have been many experiments done by Zomato in this phase including starting a food porn website! -
The company has been trying all it can to battle it out with Swiggy which has been a pureplay delivery portal without paying any heed to User Generated Content. Zomato on the other hand is still a powerful restaurant discovery brand for dine-out with almost a monopoly.
A quick summary of the history of Indian food-tech and a must read to know how it has evolved. Zomato has cut through a lot of startups in this domain to be in the top 2 as only 2 relevant players exist.
https://www.linkedin.com/pulse/india-food-delivery-market-evolution-road-ahead-ankit-arora/
Proxy for rising online transacting users: Core to Company Valuation-
We all are trying to make sense of what valuation will this be at, compare it to some platform companies listed in India, compare it to global peers in USA, Europe ,China but the bottom line is, this is would be the only listed B2C tech company in India which bets on the rising internet users, rising active internet users and the rising active transacting internet users. Some points to assimilate and if required re-assimilate before the whole valuation piece is drawn-
In 2020, India had nearly 700 million internet users across the country. This figure was projected to grow to over 974 million users by 2025 .
Mint-
India’s e-commerce market is set to clock $100-120 billion in gross merchandise value (GMV) and 300-350 million shoppers by 2025, a report by Bain and Co. said.
DRHP-
Internet and smartphone penetration in India has doubled since 2015. Easy availability of smartphones, cheap data and high speed 4G connections have enabled Indians to embrace digital applications. Food consumption, at US$670 billion in 2019 constitutes around a quarter of India’s GDP. However, most of this is driven by home-cooked food and restaurant food (or Food Services) currently contributes only approximately 10% to the food consumption market. This is substantially low when compared to United States and China. According to RedSeer, we have a large total addressable Food Services market opportunity of US$65 billion growing to US$110 billion in 2025.
DRHP-
During the last month of the Fiscals 2018, 2019 and 2020 and December 2020, Active Food Delivery Restaurants were 33,192, 94,286, 143,089 and 132,769, and average MTU on our platform were 0.9 million, 5.6 million, 10.7 million and 5.8 million, respectively in Fiscal 2018, Fiscal 2019, Fiscal 2020 and nine months ended December 31, 2020.
For FY20 the company had 10 mn Monthly transacting users and 40 mn active. No prize for guessing this number will be a big jump from here by 2025. Most of its new revenue experiments will fail, but at this level of brand scale, would need only a handful of them to succeed. One brokerage note mentioned, given the low women labor participation rate the growth in the user TAM might be restricted, well we all have seen where this has landed so far.
Current Business of the Company:-
It is food delivery with other young/old pieces attached. Reservations is not yet monetized but would remain an ad revenue enabler rather than B2C revenue generation.
A detailed note on the business model here, would be unfair to reproduce any of that here-
https://www.capitalmind.in/2021/05/zomato-ipo-should-you-place-an-order-to-buy-shares/
User Acquisition is the Capex:-
Acquiring Active Users is like setting up a factory -> 4 crore Monthly
Transacting Users are akin to actual production -> 1 crore Monthly
Repeat Transaction Users are clients who keep ordering more with minimal marketing effort, on this front the company has given limited data. But based on its Gross Order numbers, the users are coming back and also buying more ,
The average order value does translate to revenues, given food the startling difference in AOV say for DoorDash which is $35+ vs for Zomato it is $6, so frequency of ordering becomes an important metric.
Although, there could be a detailed breakup of this data which the company has not shared. The Ken article also, points towards certain anomalies in market share linked to Gross Order Value-
https://the-ken.com/story/the-non-obvious-takeaways-from-zomatos-ipo-prospectus/?utm_source=daily_story&utm_medium=email&utm_campaign=daily_newsletter
Unit Economics-
The company reported improved per unit margin from a loss of Rs. 30 to making Rs.22 per order. Having said that with a post IPO wallet of Rs.12,500 crore (USD 1.5 bn) the numbers are most likely to change QoQ. There are various measures for CAC and LTV calculations, there is one discussed in this very insightful blog on Zomato’s probable future market size and current CAC estimates -
https://haphazardlinkages.medium.com/deep-dive-into-zomato-ca01bcaacade
I do not agree with the CAC workings here, simple approach but can lead to misleading conclusions. But the points mentioned on how the business has developed, risks involved and the valuation model are worth noting. The habit formation for a large population to cater to newer cuisines and resto food in a diverse land as ours surely cannot be measured in CAC. I personally do not remember seeing an Ad forcing me to open the App for sure. Once it is opened we all are drooling and gearing up the company’s Long Term Value number.
A simpler version of unit economic working can be read here-
https://finshots.in/archive/zomatos-unit-economics/
A bit away from the whole burning huge loads of money to become unicorn narrative, there could be many ways to build and dominate a business, run decade old asset heavy businesses with mix of equity, debt, internal accruals or create a mega brand again over decades with great ROE. The way new businesses in the tech space are built are nothing to compare with the above two examples. With tech and primarily B2C tech its the race to capture, create and grow the market. Zomato has a negative working capital, has moved to positive unit level economics and it has a large market to cater to.
Valuation-
Before we begin some stats from India and US markets.
USA
3300 + companies >$350 mn Sales
200+ companies with P/S > 10 and Sales > $350 mn
200+ with 3Y Growth > 50 % and MCap > 1 Bn
India
400+ companies >$350 mn Sales
15+ companies with P/S > 10 and Sales > $350 mn
2 companies with 3Y Growth > 50 % and MCap > 1 Bn (1 financial co and 1 investment so can think of this as 0)
Source: https://wallmine.com/ , screener.in
I could begin the rigmarole of doing point to point comparison of valuation, revenue, user metrics , market size but that in reality has nothing to affect the valuation. If there is a single company listed within an entire universe of 1500+ relevant stocks and there is only more company of its kind in the country, we all can spare the overseas math however important it seems. I personally was/am (or confused) tuned to P/E, EV/EBITDA, PEG, P/Cash, P/S and various other metrics. But if we were to see how all these have turned when a business has seemed to be unique/niche/a monopoly the numbers have gone far out as there is no mean to revert to.
If we see the American Market share chart, DoorDash has ripped apart all its peers and it peaked at more than 25x P/S, Just Eat which has acquired GrubHub has a combined revenue equal to DoorDash’s Annual Revenue Rate but less than half its Market Cap, low growth is punished where the core competency is tech disruption and market share is acquired by someone else-
https://infogram.com/us-food-delivery-marketshare-1hnq41vl7znk43z
DoorDash Published Q1 for FY21 were nothing short of sensational-
Zomato’s Revenue pace right until March 2020 was right in to the alley too (although spare the cash burn narrative again).
As far as ‘unconventional’ valuation goes -Dmart, Dixon, Alkyl, Indiamart, Affle, Gas, Green etc the list is endless. We can try mapping their valuation but they are unique businesses and the debate of which one is a persistent business or not maybe parked for another day. Most of these companies have decimated all valuation cynics including me most probably. AMC businesses trade at valuations not seen across the globe, FMCG trades way above global averages. More portfolios are to be built with lesser names to choose from.
Zomato most likely would be in top 50 companies post listing by market cap, even small cap funds have 2-5% large cap exposure, point being all will run to buy this one if not us. Given the SEBI rules on ownership for loss making companies/startups to list, retail participation would be restricted initially.
This was a really long piece, the point being at a CAGR of 30%, the company can touch 5.5k cr+ and at 50% the revenue would be 10kcr+ by 2025. We can put our math skills at work but the race to $20 bn market cap in 3 years has begun, it would not matter if we like it or not!
P.S- I have enough coffee bought by many of few which would last me a quarter or more, but if you still insist you can refer to my previous posts!
Future ? -
Ok that is an impressive para on how to use $1.5bn, some more elaboration would do though once it is listed :)