Zomato, the Indian food delivery giant, is all set to become the first among its several counterparts and other emerging Indian tech startups to eye a public listing this year. The company is expected to secure about 750 million to 1 billion USD through IPO, initial public offering in the upcoming months.
Deepinder Goyal, the co-founder and Chief Executive Officer of Zomato (1), stated that unlike conventional IPOs, no investor is likely to take the money off the table by selling their shares or making an exit. It comes from the belief that Zomato is all set to become a 50 billion USD company in the upcoming five years.
There are reports that the Zomato IPO will most probably be 100% primary. It indicates the food delivery giant would end up securing more capital. During the pre-funding rounds, the food delivery giant was valued at 5.4 billion USD. Zomato is all set to increase its valuation to 6 to 8 billion USD in the upcoming IPO.
During its pre-IPO exercise, the restaurant aggregator Zomato had surged its paid-up capital three times to 1,448 crore INR from 535 crore INR ahead of its proposed initial public offering take place in the upcoming future (2).
The report also suggests that the development came when the company’s fundraising ability had been crippled due to the restrictions imposed by the Indian government on Chinese investments after a stiff standoff at the LAC, line of actual control. In its pursuit to maim investments from China, India has introduced a law to restrict investments from countries sharing their borders with India. The rule had made it compulsory for these countries to seek the Indian government’s approval before making the investments (3).
Read Also: Why India is Approving China FDI Proposals
It is worth highlighting that Jack Ma’s Ant Capital is among the key investors in the food delivery giant Zomato. In the previous year, Ant Capital eagerly wanted to infuse capital into zomato and even apply to the Indian government for approval. However, the China-based company did not receive any consent for the same. It had prompted the startup to look at alternative funding options.
As per a source familiar with the matter, for Zomato, IPO is the best option in the current scenario than a private placement since it would dilute Ant Capital’s rights and capital proportionally along with the food giant’s other investors.
Another source stated that the IPO would be path-breaking for Indian markets. A successful listing of zomato in India would encourage several other homegrown startups to consider a domestic listing. The source added that it would be fascinating to know how Zomato would go about valuation and pricing since it would act as a benchmark for several other startup listings to come (4).
The recent IPO development comes after Swiggy talks to secure 800 million USD for its several ventures, including home delivery, swiggy stores, and more integrated reach in the urban area (5). Since Zomato is Swiggy’s arch-rival, with both of them being food delivery companies and the ones with maximum market share, Zomato has come up with its ambitious initial public offering plan to raise its valuation even after crippled funding from China.
Cushioning the Fuel Price Rise Impact
Last week, Zomato had announced that it had hiked the salaries of its delivery partners amid the rising fuel prices in the country.
It is worth highlighting that India’s fuel prices have been rising continuously for the past 15 days. In Delhi alone, petrol costs more than 90 INR while diesel prices now above 80 INR. In Mumbai, petrol is above 97 INR, and diesel costs more than 88 INR (6).
Zomato stated that with the rising petrol prices, its riders who travel more than 100 to 200 kilometers every day are now spending as much as 800 INR per month. Apart from a hike in salaries, delivery partners would also get an additional return travel fee if they have gone far from their base region.
Mohit Sardana, the Chief Operating Officer at Zomato (7), stated that ‘the company can understand how fuel price hikes can impact their delivery partners earnings. Hence the company has decided to consider such developments in its pay structure. Both of these inclusions would increase delivery partners’ earning by 7 to 8%. The startup has already fulfilled the new structure in more than 40 cities across the country and will be launching in other areas in the upcoming week.’
However, partners who have acknowledged the salary increase believe that it could have been more. According to delivery partners, different delivery partners have different remuneration that they receive according to their city and how long they have worked with the organization.
According to Zomato, the hike amount won’t be fixed but would be proportional to the rise in fuel prices.
It is worth highlighting that Zomato, along with its rivals Swiggy, is among India’s major gig economy players. Together, they employ more than thousands of riders for food delivery. As per a Goldman Sachs report from November 2020, Zomato, which alone employs more than two hundred thousand riders, delivery is 75% of its total revenues in the country.
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Zomato, incepted in 2008, also recently secured 250 million USD ahead of its IPO this year, pushing its valuation from 3.6 billion USD to 5.4 billion USD (8).
Sustaining Capital to Stay Competitive
With the latest funding round, Zomato has emerged as India’s most valued food tech unicorn with a valuation of 5.4 billion USD. It indicates the confidence of Zomato investors in the company.
It is worth mentioning that Zomato had a tough time during the initial months of the coronavirus pandemic. It had to lay off a sizable workforce amid the resultant countrywide lockdown (9). However, the company has started hiring again as the business is starting to return to normalcy.
Zomato is ramping up for its upcoming IPO, and its investors seem to be optimistic about the company’s stock prospects. The capital securement ahead of the proposed IPO is in line with the startup’s strategy to advance its finances for pursuing M&A while also working off competition and approach challenges, including price war.
India is the second-fastest-growing food delivery market across the globe. And Global Data forecasts that the market would grow at a CAGR, Compound Annual Growth Rate of 12.4% from 2019 to 2023 (10).
Zomato is aggressively competing with Swiggy to grab significant market share. Moreover, with Amazon’s entry into the Indian food delivery market, Zomato and Swiggy must strengthen their capital to be future-ready for an environment where price war and competition intensify. It is also crucial for Zomato with its plan to go public later this year.
Raising A Billion USD
Zomato is looking at securing 750 million USD to 1 billion USD through its planned initial public offering without investor exit or share sales. It means that the company would end up clocking more capital than shareholders offloading stock in the open market (11).
Deepinder Goyal, while addressing the staff during a town hall earlier this week, stated that no existing shareholder is willing to sell any company share for the IPO. He further added that people think that Zomato would be a 50 billion USD company in the upcoming five years, and it would be unwise to sell shares right now.
The existing investors of Zomato include Tiger Global, Temasek Holdings, Sequoia Capital, and Info Edge India. Their decision not to sell their shares at IPO means that they and other investors would not make returns immediately.
Zomato expects to secure a 6 to 8 billion USD valuation upon its IPO launch around June 2021. The backing from its investors would help Zomato against strong competition from Swiggy, securing 800 million USD capital. Several reports suggest that Zomato is also looking to reduce its cash burn and get closer to profits.
Zomato, the Gurugram-based online food aggregator and its main rival, Swiggy, struggled like other businesses because of the coronavirus pandemic’s downturn.
Even though Zomato laid off the workforce, cut salaries, and withdrew from several cities across the country during the lockdown, it has since recast its business, including sharply reducing discounts for food delivery and introducing contactless dining to survive the economic fall out of the coronavirus pandemic.
Zomato, which started as a restaurant discovery and review platform, recently closed a 250 million USD primary funding round with another 250 million USD shares sold by existing investors, including China’s Ant Financials, on January 27.
Investors are hoping high for Zomato’s IPO prospects, following the successful IPO of DoorDash, backed by SoftBank, in December, when the United States-based food delivery startup was listed at 182 USD New York Stock Exchange. It was about 78% higher than its IPO price. DoorDash had secured about 3.4 billion USD in the initial sale and was valued at 34.2 billion USD, over a double from 15 billion USD it had commanded in the private market a year ago (12).
Zomato and Swiggy have benefited from the online food-ordering space revival after a few unfavorable months last year amid the nationwide lockdown.
While announcing the 660 million USD fundraise, Goyal had stated that the company is on its way to mark its best-ever monthly sales in December. The company was clocking about 25% higher GMV gross merchandise value compared to previous peaks in February 2020. He further added that the tailwinds for the food delivery businesses are crystal clear, and he believes that the sector’s growth would accelerate post-vaccine.
Increased Momentum for IPO
A bunch of tech firms in the world’s third-largest startup ecosystem is preparing to list their shares on Indian and foreign markets. They are going through increasing internal changes like realigning their cap tables and raising pre-IPO rounds.
Zomato, an online food-tech giant, is also charting its future course of action involving filing its war chest against swiggy and upcoming challenger Amazon Food.
Simultaneously, PolicyBazaar, an online insurance aggregator, has recently completed a secondary share sale worth 45 million USD at a valuation of 2.4 billion USD (13). The funding round gave exit to private equity firm True North and other angel and individual investors. According to several reports, before this, PolicyBazaar had done a secondary share transaction in November 2020 worth 20 million USD. The 12-year-old digital insurance marketplace is eyeing a valuation of about 3.5 billion USD for its planned IPO.
Meanwhile, the omnichannel beauty retailer, Nykaa, is in a discussion to secure 50 to 150 million USD at a two billion USD valuation ahead of its listing at the end of the year or early next year (14).
The Mumbai-headquartered startup is expecting a valuation of 3.5 billion USD during the IPO. Last March, Nykaa forayed into the unicorn club after securing a 1.2 billion USD round led by Steadview Capital which valued the startup at 1.2 billion USD. According to reports, it is now looking to realign its cap table.
Some of the other startups that are ramping up to go public include LensKart, an omnichannel eyewear retailer, Nazara technologies, a gaming firm, Freshworks, a SaaS giant, Delhivery e-commerce logistics firm, and Grofers, an e grocery platform (15).
The IPO Routes
Zomato has recently restructured its capital base to create 8.8 billion new shares and tripled its paid-up capital. It indicates the company’s intent in the near term.
Zomato’s initial public listing plan seems to be advanced because of its better-than-expected performance during the pandemic. However, Zomato has reported a 160.6% increase in its financial year 2020 losses, to 2,451 crore INR from 940 crore INR in the financial year 2019, while its revenue increased by 2,485 crore INR in the financial year 2020 from 1,255 crore INR in the financial year 2019 (16).
Notably, Zomato is part of a crop of internet-based farms, including Nykaa, Flipkart, Paytm, and PolicyBazaar, planning their IPO in the upcoming year or two (17).
According to HSBC global research report, the Indian internet-based startups have received more than 60 billion USD investments in the past five years. And around 12 billion USD investments here in 2020 alone (18).
However, unlike conventional profit-making firms that list Indian stock exchanges, they continue to be loss-making ventures. The SEBI, Securities and Exchange Board of India, keeps a close watch on pricing and valuations of IPOs and companies entering the market, with profitability being a chief factor. However, with the emergence of internet-based ventures over the past decade, things are changing.
Last December, SEBI had released the consultation paper on ‘Review of Framework of Innovators Growth Platform’ (19) with recommendations to make the listing of internet-based companies easier in the country and enable more local retail investors to engage.
Conventionally, SEBI’s ICDR, Issue of Capital and Disclosure Requirements regulations only allowed profit-making companies to list on the stock market. Normally, an Indian listing would have required the issuer to have a pre-tax profit of at least 15 crore INR in the three of the past five fiscal years. Only a few Indian tech startups have reached this level of maturity, and accordingly, public market opportunities will remain largely inaccessible.
According to ICDR guidelines, SEBI only allows a loss-making company to the public if 75% of its net public offer is allotted to QIBs, including insurance, mutual fund companies, and alternative investment funds. It means only 25% of its net offer is available to investors and high net worth individuals, raising fewer retail investors’ funds.
The previous restrictions on the ITP and IGP alternatives, including size trading, lot sizes, and eligible investors, did not present a compelling alternative. But, reforms proposed by the PMAC last December, if implemented, are likely to address many of these challenges under the IGP framework and come to the fore as a serious alternative to the overseas listing.
The pandemic has helped shift the mindset of several traditional investors. Many of them have recognized the importance of digitization and automation; similar companies such as DoorDash can go for an IPO then why can’t Indian startups go for it.
Notably, one of the biggest challenges in the Indian startup ecosystem is not enough exits. It needs to happen for the ecosystem to mature. Presently, exits happen when a large global Giants acquire a company like Flipkart and Walmart or when smaller funds exit to larger funds.
Secondly, domestic participation in tech startups is very low since most of the large fund deals include foreign investors. These are two real routes for an exit so far. There is hope that the IGP or regulator IPO would provide a third route.
However, the question is, would startups that are unicorns or bigger such as Zomato or Paytm want to list on an additional platform like the IGP. We need to understand that the IGP would only be suitable for early-stage startups, and once they achieve scale and high valuation, they would need to graduate to the primary boards.
India should consider allowing certain exceptions from the additional listing requirements for internet-based startups similar to the Job Act in the US that allow businesses of a certain size significant relaxations from filing and compliance requirements till they attain a certain threshold. It can allow these companies to list and graduate to the more stringent requirements expected of actual public firms in a phased manner.
While there are more than 34 unicorns in India, including Glance, Paytm, Zomato, Big Basket, Swiggy, Udaan, and Nykaa, most of these firms are planning for IPOs, nonetheless of the IGP’s execution, some in India. Still, as per experts, most are considering an overseas listing.
It is because of several reasons. The Indian market is hugely dependent on inflows from foreign financial institutions and local domestic financial institutions. In the United States, the valuation methodology and metrics are completely different. It is why one would find an ocean of difference between overseas valuation, especially in the United States and India valuations.
Companies such as Flipkart and FreshWorks are also reportedly planning IPOs in the US. For companies incorporated in the United States or have investors in there, the option to list overseas seems more beneficial.
Moreover, tech IPOs that are bigger than a particular size, for instance, 6 to 8 billion USD, are likely to be listed abroad on account of the depth and liquidity on offer despite the IGP being implemented. There are also perceptions that overseas investors understand technology companies and startups better, leading to better valuations.
It is worth highlighting that Pepperfry has always preferred an Indian IPO irrespective of the IGP. The company trusts a lot of merit in an Indian IPO despite the heresy around Indian investors not being educated enough. The company believes that the Indian investor is savvy as an investor outside of India and can understand the business from different perspectives.
There is also a perception that the companies listing overseas would attract a higher level of scrutiny by regulators in those markets and prove more expensive.
As a business that is so greatly connected with its customers and suppliers in the country, it would be easier to sell a story to people who know the founders and the business model than selling the story to people who have only heard about it.
Apart from the optimistic execution of the IGP, India must also create a different framework for SPACs in India while also protecting retail investors’ interests similar to the US and other developed markets. The government needs to realize and enable new structures to propel startups, which are the key to a 5 trillion USD economy.
With that being said, internet-based startups have enough options to list both in India and overseas (20).
The Final Note
It looks like the Zomato IPO would be the talk of the town for months to come. As the online food delivery business resembles its pre-pandemic heydays, Zomato looks to take an even higher notch with its IPO.
The food delivery startup would be among the first Indian tech startups to go public in 2021. And the company is hoping to hit the 50 billion USD valuation mark in the upcoming five years with the assertion.
Following the recent development, there are expectations that Zomato would launch its IPO somewhere around June this year with the valuation in the range of 6 to 8 billion USD. The upward curve in which the IPO augurs was at stark ends when the pandemic wreaked havoc on the country’s businesses.
The bigger picture from the announcement is also where the Indian food delivery app is the first among a growing flock of tech startups eying for listing this year. As we have discussed, for Zomato’s vantage, investors’ reason to be all the more pumped about the finality of going public is seeing a successful precedent IPO of a US-based food delivery startup DoorDash. It secured around 3.4 billion USD in the initial share sales. Its current valuation is 53.6 billion USD, which Zomato would also aim to get eventually.
Since Zomato ended the new year on a high, the announcement looks to usher in exciting new times for the company ahead. With the pace, we believe that cracking the 50 billion valuations mark would come in good time.
Stay tuned for more updates.