zomato IPO: As countdown begins for Zomato IPO, a Rs 14,000 crore question looms

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NEW DELHI: Where will the IPO-bound Zomato put its huge cash pile to work? This question is worth Rs 14,000 crore, and how!

Despite improved unit economics and lower cash burn, Zomato went on a fund-raising spree in FY21, with Rs 4,800 crore worth of equity capital raised in the first nine months and another funding round of Rs 1,800 crore came in February, making analysts wonder what will the Indian multinational restaurant aggregator and food delivery company do with the cash on balance sheet post its Rs 8,250 crore IPO.

The proposed offer will comprise Rs 7,500 crore worth of fresh issue and Rs 750 crore worth of share sale by Info Edge.

In its draft red herring prospectus, Zomato proposes to utilise 75 per cent of the Rs 7,500 crore IPO proceeds for tapping organic and inorganic growth opportunities and the rest for general corporate purposes.

Of the 75 per cent funds, at least 40 per cent would be utilised for organic growth initiatives, including customer acquisition, ramping up of delivery infrastructure and building of tech capabilities. The rest could be used to fund, in part or full, inorganic acquisitions.

Jefferies believes after raising Rs 7,500 crore from the fresh equity issue in the IPO, the company’s post-issue cash and liquid investment would surge to over Rs 14,000 crore.

As Swiggy and Zomato now account for most of the food aggregator industry in India, acquisition opportunities within the category are fairly limited, the brokerage said.

“Expansion beyond the core business is a fair possibility, and there is limited clarity on the categories that Zomato might explore and deploy capital in,” Jefferies said.

Zomato recently rolled out own-branded nutraceutical products on its platform.

Quoting two people in the know, ET reported that Zomato was in talks to invest around $100 million in e-grocer Grofers after discussions of a possible merger between the two fell through last year. Neither of the companies have commented on this.

Zomato’s rival Swiggy is pushing its quick grocery delivery service Instamart and daily essentials delivery platform Super Daily in an attempt to diversify.

Zomato, which experimented with grocery delivery during the initial months of the pandemic under Zomato Market, has since discontinued the service, saying it was not core to its business.

Zomato has raised substantial equity capital over the years, most of which has gone into funding operating losses and inorganic acquisitions.

In January 2020, the group entered an agreement to purchase ‘Uber Eats Asset’ in India, along with a non-compete and brand licence arrangement for India from Uber India Systems. In November 2018, the group entered an agreement to purchase 100 per cent stake in Tonguestun Food Network in tranches.

“The group acquired that business because the latter used to arrange outdoor catering, supplies prepared foodstuffs to individuals, firms and corporate bodies (end- customers) from caterers (merchants) and acts as an agent between end-customers and caterers (merchants),” Anand Rathi Financial Services said in a note.

The brokerage also cited a February 2018 deal where the group acquired 80.20 per cent of the voting shares in non-listed Carthero Technologies, which provides a technology platform for quick-delivery services, enabling local retailers to ship products to customers directly with the help of mobile applications.

Later in March, the same year, the group acquired an additional 4.25 per cent interest in the voting shares to take ownership interest in the company to 84.45 per cent.

The company has also been trying to dip its toes in areas that are ancillary to its core interest. In 2019, Zomato floated its business-to-business (B2B) vertical Hyperpure, which supplies ingredients and kitchen products to restaurants. By the end of December 2020, it had supplied to over 6,000 restaurants across six cities.

Anand Rathi said Zomato and Swiggy have established a duopoly in the food-delivery market in India with a combined 90 per cent market share. That said, Amazon, which started its food delivery service, Amazon Food, in Bengaluru last year in four zip codes, has since expanded to 62 zip codes. Amazon is offering free food delivery to Prime members.

“Even though it is limited to one key market in India, Amazon Food is vigorously trying to undercut competition,” Anand Rathi noted.

Jefferies estimates that the -IPO cash balance would be sufficient for 6-7 years of cash burn and if the burn-rate drops, this would imply as much as 10-years of cash burn.

Ambit Capital in a May 5 note said the key questions for the company management would include the areas Zomato is eyeing for inorganic growth and its thoughts on competitive challenges across food delivery and hyper-pure businesses.

“Clarity is needed on the usage of 45 per cent of proceeds for M&A, nutraceutical foray etc. These technical factors may drive investor interest, which may have broader implications,” Jefferies said.

Zomato filed the draft red herring prospectus (DRHP) for an Rs 8,250 crore initial public offering (IPO), with a fresh issue of equity shares worth Rs 7,500 crore and an offer for sale of Rs 750 crore by its largest stakeholder Info Edge weeks back.

The company, which was last valued at $5.4 billion in February 2021, competes with Swiggy for the Indian online food-delivery space, which could become a $11 billion market in the next five years, as per CLSA.

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