Global IPO Activity Extends Beyond US Borders

The surge in Initial Public Offerings (IPOs) observed throughout 2021 isn't limited to companies within the United States. Several international entities are also capitalizing on the current market enthusiasm for unicorn companies seeking liquidity.

This week, Zomato, a food-delivery unicorn headquartered in India, submitted its application to become a publicly traded company. According to reporting from TechCrunch, the company plans to be listed on both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India.

Significance of the Zomato IPO

The Zomato IPO holds substantial importance for the Indian startup ecosystem. As previously noted by Manish Singh, a successful public listing for Zomato could motivate approximately twelve other Indian unicorn startups to expedite their preparations for entering the public markets.

Therefore, Zomato’s upcoming debut is significant not only for the insights it provides into the company’s financial performance, but also for its potential to trigger a wave of liquidity events within India, contingent upon a successful flotation.

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Returning to Zomato, the company’s IPO documentation reveals a narrative of rapid growth temporarily impacted by the pandemic. However, the unicorn has demonstrated a strong recovery in recent financial quarters.

Furthermore, its financial model is evolving towards a stage where establishing a sustainable path to long-term profitability is becoming feasible. Today, we will examine the company’s financial data to understand the rationale behind its decision to go public at this time and to assess how investors can evaluate its recent performance.

• The IPO is expected to list on the NSE and BSE.
• A successful IPO could encourage other Indian unicorns.
• Zomato’s growth was initially impacted by the pandemic.

Zomato’s Business Operations

Zomato’s most recent valuation, as of February 2021, was approximately $5.4 billion, following a funding round that injected $250 million into the company. To date, the company has secured over $2 billion in funding, according to data from Crunchbase.

From a business perspective, Zomato’s offerings extend beyond simple food delivery services. According to its IPO documentation, the company’s core food delivery business is complemented by a “dining-out” feature enabling restaurant visits, a supply chain operation known as “Hyperpure,” and Zomato Pro, a subscription service providing discounts to its 1.4 million members.

Therefore, a direct comparison to competitors like Uber Eats – whose Indian operations were previously acquired by Zomato – is not entirely accurate.

However, we can analyze the company’s overall financial performance up to the end of 2020. The Zomato IPO filing doesn't seem to contain data regarding its performance in the first calendar quarter of 2021, which corresponds to the fourth quarter of its fiscal year 2021.

Let’s begin with a broad overview:

• Fiscal year concluded March 31, 2019: Total revenue of $187.4 million, with a loss before exceptional items totaling $296.3 million.
• Fiscal year concluded March 31, 2020: Total revenue of $367.8 million, and a loss before exceptional items of $303.5 million.
• Nine-month period ending December 31, 2020: Total revenue of $183.4 million, with a loss before exceptional items of $47.8 million.

Zomato experienced substantial growth during the fiscal years ending March 31, 2019, and 2020. Progress in reducing operating losses, however, was less pronounced. But what precisely occurred throughout the remainder of calendar year 2020? Did the company experience a contraction?

Indeed, it did. Simultaneously, the company’s losses decreased, leading to a complex assessment of positive and negative developments.

To understand the impact of the pandemic on Zomato, let’s examine its quarterly results, noting that its fiscal year 2021 began in calendar Q2 2020:

Initially, COVID-19 resulted in a halving of Zomato’s gross order volume – a significant setback.

The company subsequently recovered, achieving what its prospectus describes as “GOV growth of 91.6% and 42.3% in the second and third quarters of Fiscal 2021 respectively, compared to the preceding quarters.” The GOV in the third quarter of fiscal year 2021, or the fourth calendar quarter of 2020, represented the company’s highest achievement to date. (“Our GOV in the third quarter of Fiscal 2021 was ₹29,810 million, which was the highest GOV that we have achieved in any quarter till December 2020,” as stated by Zomato.)

This data clarifies the timing of the Zomato IPO; the company is pursuing a public offering not based on consistent historical growth, but on a strong recovery from pandemic-related declines.

However, one might ask, even with prior growth and substantial cash expenditure, what value does a post-COVID recovery hold given the inherent challenges of the business? This is a valid point. Fortunately for Zomato and its investors, its economic fundamentals have recently improved.

The following two charts illustrate the unit economics recorded by Zomato during its fiscal year 2020 (the 12-month period ending March 31, 2020) and the first three quarters of its fiscal year 2021 (the nine-month period ending December 31, 2020):

What factors contributed to this shift, transforming Zomato’s business from a financially unsustainable model to one that appears considerably more robust? These include:

• An increase in commission per order, rising from ₹43.6 to ₹62.8, representing a 44% increase.
• A rise in the customer delivery charge per order, from ₹15.3 to ₹26.8, or a 75% increase.
• Moderate improvements in delivery costs.
• A reduction in discounts per order, decreasing from ₹21.7 to ₹7.3, or a 66% decrease.
• Slight improvements in variable costs.

In essence, a comprehensive enhancement across nearly all aspects of its unit economics. The impact of these changes is substantial, as demonstrated in the following chart, which tracks the transition from negative to positive contribution margins:

The decline in the final quarter is a concern and may raise questions among investors regarding the long-term trajectory of Zomato’s contribution margin as a percentage of GOV. However, combining the company’s rapid recovery in order volume following COVID-19 with its improving economics allows Zomato to present a compelling case for a path toward profitability.

To further illustrate the magnitude of the improvements required to achieve the current positive profit territory, consider the following chart:

The chart highlights the “investment” phase during fiscal 2019 and the subsequent reduction in promotional spending as a percentage of revenue over time. A key question remains: To what extent can the company further reduce this ratio? Every rupee saved on promotional costs represents a potential contribution toward ending its history of cash burn.

Furthermore, Zomato’s cash burn has also decreased in recent quarters. From a substantial operating cash burn of $287.9 million in fiscal 2020 to just over $36 million in the final nine months of 2020, the company’s improved unit economics have significantly reduced its cash requirements. While not yet self-sustaining, the company’s operations have demonstrably improved.

Finally, let’s consider some key questions:

• Can Zomato maintain the changes to its economic model that were potentially influenced by COVID-19; that is, will consumers continue to accept higher fees once the pandemic subsides?
• Could a resurgence of COVID-19 reduce demand for Zomato’s services in the coming quarters, potentially jeopardizing its recovery?
• Can the company sustain rapid growth while maintaining its improved unit economics in the years ahead?

Your answers to these questions will shape your perspective on the Zomato IPO. Regardless of individual viewpoints, the market’s assessment of the company is crucial for numerous other unicorns and startups, making it a matter of significant importance.