India’s first food delivery IPO is finally on its way—but Amazon could be a speed bump

Ready for the next big delivery.
Ready for the next big delivery.
Image: YouTube/Zomato
We may earn a commission from links on this page.

One of India’s largest food-delivery players is gearing up to deliver an IPO after its business got a boost due to the Covid-19 pandemic.

Zomato is reportedly planning to kickstart the process for its initial public offering as early as next month and get listed on Indian stock exchanges by September. Currently valued at $5.4 billion (Rs39,173 crore), the company is looking to raise $650 million at a valuation of $6-8 billion.

Prima facie, Zomato appears to be in good shape to go public.

For one, the 12-year-old company has so far raised over $2 billion in funding from investors such as Tiger Global, Steadview Capital, and Mirae Asset Venture Investment. Half of this funding happened during the Covid-19 pandemic, as its business has boomed since March 2020 when coronavirus reached Indian shores. “Stringent focus on safety and hygiene, adequate supply and the subsequent festive season” has translated into the platform doing “120% of pre-Covid GMV (gross merchandise value) with steady week-on-week growth in order volume,” the restaurant aggregator and food delivery firm told Quartz in March.

During the financial year ending March 2020, the company’s revenues swelled 98% to Rs2,486. Its losses widened by 160% during the same period to Rs2,450 crore, but experts believe that doesn’t really matter.

“As the pandemic-fuelled online ordering helps these aggregators, it is easy to lose focus on the challenges these businesses are facing. Most of them are burning cash,” said Yugal Joshi, vice-president at Texas-based research firm Everest Group. “However, the focus in these firms is to enhance topline rather than focus on the bottom. If the investors are willing to acknowledge and appreciate that story, Zomato should do well.”

A promising Zomato IPO

Zomato’s CEO Deepinder Goyal has said he expects his company to be worth as much as $50 billion in five years. Experts agree that the company could become a “multi-bagger”—a stock whose price rises multiple many times their initial investment values.

“Zomato is a leading player in the Indian online food delivery market, a booming space, which holds significant growth potential,” Aurojyoti Bose, lead analyst at analytics and consulting firm GlobalData, told Quartz.India is the second-fastest-growing food delivery market in the world.” Last January, after its acquisition of Uber Eats, Zomato’s market share climbed to 55%—surpassing its closest rival Swiggy. GlobalData forecasts India’s food delivery market to grow at a compound annual growth rate of 12.4% during 2019-2023, Bose said. 

Even halfway across the world, food delivery companies have performed well, according to Viraj Nanda, CEO of Globalise, a platform that helps Indian investors invest in American stocks. Take DoorDash, for instance, which went public in the US in December 2020. The company’s stock is currently trading at 33% above its IPO price of $102.

“Across the US and Europe, companies like Instacart and Deliveroo are also looking to capitalise on the current positive momentum in the equity markets and go public in 2021,” Nanda said. “In India as well, there have been a number of IPOs in 2021 to date, and investor appetite continues to remain strong for new companies coming to market.”

Last year, Indian companies cumulatively raised over Rs25,500 crore via IPOs, which was 40% higher than the capital raised via this route in 2019. Between Jan. 1 and March 2 this year, nine Indian companies already made their stock market debuts, garnering a total of $1.46 billion (Rs10,950 crore)—the highest fund-raising via IPOs during this period since the corresponding weeks in 2008.

What gives Zomato added advantage is the fact that it has an investor who has been there and done that.

Info Edge, one of Zomato’s earliest and largest investors, listed on India’s National Stock Exchange and BSE over a decade ago. News of Zomato’s IPO has made Info Edge’s stock surge. “As an investor, Info Edge will benefit from Zomato’s growth. So, it is likely to be making Zomato IPO ready by helping in paper works and fulfilling compliance requirements,” said Bose.

But there’s one competitor that could send these plans into a tizzy.

The Amazon angle

Amazon’s foray into food-tech could dampen sentiment around Zomato’s IPO plans, experts warn. The deep-pocketed Seattle-based behemoth could potentially give Zomato and Swiggy a run for their money with massive marketing campaigns and discounting and its extensive logistics network, among other things.

Amazon is entering the segment at a time when incumbents Zomato and Swiggy are facing heat from restaurants for charging high commissions of 20-30%. Amazon’s limited launch in Bengaluru shows the company is charging less than half with a commission of around 10% on order value from restaurant partners, a March 10 report by Motilal Oswal Institutional Equities said.

“Given its (Amazon’s) strong understanding on the delivery logistics and a loyal customer base, expansion into food delivery appears to be a logical step,” a March analyst note from Jefferies Financial Group stated.

Amazon is also charging no delivery fee to its Prime membership subscribers, unlike its rivals that charge anywhere between Rs20-100, the Motilal Oswal report noted. Non-prime members are charged a nominal Rs19. Moreover, “packaging fees is also waived-off for now,” the Jefferies memo said. “There are also attractive cashbacks depending on bill value.”

The stiff competition also comes at a time when the tailwinds experienced during the pandemic are dying down with the vaccine rollout and more customers willing to eat out.

The perks and perils of going public

Experts caution that once firms go public, the scrutiny goes up manifold. This might post hurdles for Zomato given the fact that its closest rivals will continue to stay away from this scrutiny.

“Publicly listed companies have lot more regulations to follow and if peers such as Swiggy continue to be private, they may be more nimble to respond to the market,” said Joshi. “Many companies globally have gone down the privatisation route when they had to transform—Dell, for example—because taking big bets as a private firm is relatively easier.”

Post an IPO, there is definitely a greater focus on profitability, and the lack of positive progress on this front can severely hamper share price performance. For example, though DoorDash’s first earnings report after its public debut beat analyst estimates on the revenues front, it included a large net loss. Consequently, its share price fell 13% on the day of the announcement.

In fact, several startups that recently got listed in the US—Uber, Lyft, WeWork—ended up trading at a discount after their listing.  “Many investors believed their private valuations were inflated and therefore, not tenable in the public market,” said Joshi.

Despite the pitfalls, Indian companies seem optimistic given the several upsides of an IPO, from raising capital to increased liquidity for existing shareholders to greater market visibility.

Beauty e-tailer Nykaa is also eyeing an IPO later this year, a January Bloomberg report noted. A clutch of other Indian startups including Walmart-owned e-commerce firm Flipkart and ride-hailing company Ola will reportedly list on the bourses soon, too.