Zomato’s IPO is a test case for India’s loss-making unicorns

Zomato is offering fresh equity shares of up to $1.2 billion as well as $50 million worth of existing shares, making its IPO one of India’s largest this year. The offering will give the company a projected market capitalization of INR 600 billion, or $8.1 billion, and test whether Indian investors are finally ready to back businesses that have yet to turn a profit.

Zomato’s platform offers a number of services like restaurant search and reviews, but its chief business is food delivery to homes and offices, which accounts for 80% of revenue, according to Yes Securities. Restaurants pay Zomato a fee to appear on the platform, and Zomato charges customers a delivery fee for orders made on its app. 

In the past, Indian technology companies preferred to list overseas to tap into higher valuations and a wider pool of global investors. But now most large global investors have access to the Indian markets, says Pranav Haldea, managing director of Prime Database, an Indian database dedicated to the primary capital market. In recent years, several global investors have registered with the stock regulator to invest in India because the country is seen as one of the world’s more lucrative markets.

“I think the Zomato IPO could open the floodgates for tech-based startups to list in India, if successful,” Haldea says. Investors may see India’s tech-based startups as an alternative to China’s digital giants, just as Beijing broadens its tech crackdown. Plus, India boasts a projected GDP growth rate of 10.1% for 2022, a pace that would make it the fastest-growing economy in the world, according to a midyear update of the UN’s World Economic Situation and Prospects report in May.

A slew of tech-based startups, such as digital payments company Paytm and SoftBank-backed Policybazaar, India’s largest online insurance company, are expected to hit the IPO market in the second half of the year. Their IPOs may coincide with a market rally so long as investors remain bullish. India’s benchmark BSE index on Tuesday closed at 52,769.73, close to the record high of 53,054.76 it hit on July 7.

Zomato’s IPO is a significant milestone for the 12-year-old startup that began as a digital platform named Foodiebay that posted restaurant menus online. Founders Deepinder Goyal and Pankaj Chaddah launched Foodiebay while working at Bain Consulting after noticing how colleagues in their New Delhi office waited to get ahold of a physical menu from a nearby restaurant. They uploaded the menu to a website and the business was born.

Once the Foodiebay website took off in 2009, founders Goyal and Chaddah quit their jobs at Bain to turn their side hustle into a bona fide business. After a rebrand to Zomato, the company entered the food delivery space in 2015 to keep up with its main rival Swiggy, which had already launched the service. Zomato struggled to scale the food delivery business at first, but it finally took off in 2018 when Jack Ma’s Ant Financial injected $150 million into the company in exchange for a 14% stake.

Indian Internet company Info Edge, which runs online job portal Naukri.com, is Zomato’s biggest investor, with a 18.68% share. Uber BV, Alipay Singapore Holding, and Antfin Singapore Holding own 9.13%, 8.39%, and 8.26% of Zomato, respectively. 

On Tuesday, Zomato informed the Indian stock exchanges that it had already raised $600 million from several prominent institutional investors, including the Government of Singapore, as part of an anchor book allocation.

The IPO is a test case for whether a loss-making startup in India can stoke sufficient investor interest with a high-growth model the way unprofitable tech-based firms have lured investors elsewhere. Zomato lost INR 8,164 million, or $110 million, in the fiscal year that ended March 2021 after earning $269.4 million in revenue.  

In the past, retail investors in India have stuck to profitable companies, but that mindset may be changing as a plethora of tech-based startups log faster-than-expected growth because of the pandemic. 

Loss-making companies can list in India so long as 75% of shares are offered to so-called qualified institutional buyers, meaning banks and mutual funds that possess necessary market experience and knowledge to ensure better returns.

“Zomato will have to turn profitable quickly to justify its high valuation,” says Prateek Goyal, associate director at India Ratings, a ratings firm. The company operates in more than 500 cities, and the culture of ordering food online is still catching on in smaller cities, he says.

Traditionally, Indians have preferred to eat home-cooked food. Restaurants account for no more than 8% to 9% of the total food consumption in the country. But as India’s multigenerational households have splintered into nuclear families in cities in recent years, Indians have moved away from home cooking toward more restaurant meals. Higher incomes and Indians’ increasing comfort with technology have fueled app-based takeaway too.

The food services sector is expected to grow by 9% annually through to the financial year ending March 2023, according to the National Restaurant Association of India (NRAI). But food delivery companies have little room to increase margins with higher customer fees since Indians are accustomed to free delivery from nearby restaurants, says Rajesh Sawhney, founder at GSF Accelerator, a seed fund company. Zomato is also under pressure to keep customers and restaurant fees low to compete with Swiggy. 

A Zomato spokesman declined to comment on the company’s market share. 

“I think the core business of Zomato will struggle to make profits,” says Sawhney.

Even China’s web-based shopping platform Meituan, which is several times the scale of Zomato’s business, has toyed with different revenue streams, and the Indian food delivery company will have to do the same, he says.

“Unlike China, where Meituan is a monopoly, the food delivery business in India is seriously contested between Zomato and Swiggy,” Sawhney says.