Loss-making `fatherless-motherless’ company, unabated negative operating cash flow, bulging accumulated loss (over Rs 5600 cr), deploying huge (Rs 9000 cr) public money sans independent institutional appraisal, relinquishing promoters’ status and clinging on as `founders’ with minuscule minority public stake, controlling the management and fixing fat salaries for themselves – all these remind us of IL&FS’ episode.

Regulators’ silence on the nefarious activities of the `grey market gang’ may boost subscription prospects of any IPO these days but, absurd valuation of a loss-making consumer brand is bound to put Zomato in the league of high profile flop shows.

ZOMATO OFFER AT A GLANCE
Offer Type	Book Built
Platform	Main Frame
Offer Size	Rs 9,375 cr
Fresh Issue	Rs 9,000 Cr
Offer for Sale	Rs 375 Cr
Face Value	Re1
Price Band	Rs 72 – 76
Mkt/Bid Lot	195 Nos.
Implied M-Cap	Rs 59,623 Cr
Equity Cap	Rs 785 Cr
Free Float	100%
Lead Manager	Kotak Mahindra, Morgan Stanley, Credit Suisse, BofA Securities, Citigroup Global
Registrar	Link Intime
Listing At	BSE, NSE

 

INDICATIVE ISSUE SCHEDULE
Opening          :14-Jul-2021	Closing    :16-Jul-2021
Allotment        :22-Jul-2021	Refunding :23-Jul-2021
Demat Credit : 26-Jul-2021	Trading     :27-Jul-2021

 

The Offer

New Delhi-based start-up Zomato Ltd, which has completed 11 years, is going public with an offer valued Rs 9,375 cr, translating into 123,35,52,632 shares at the upper band. The offer comprises of a large fresh issue of Rs 9,000 cr from the company and a relatively small offer for sale of Rs 375 cr from the largest shareholder of the company, namely Info Edge (India) Ltd. The offer is being made through the book-building route with a price band of Rs 72-76 for Re1 paid-up share.

Applicants for the IPO should bid for a minimum lot of 195 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on July 27, 2021. Kotak Mahindra, Morgan Stanley, Credit Suisse, BofA Securities, Citigroup Global are acting as managers to the offer and Link Intime has been roped in as registrar to the issue. The bidding opens on Wednesday, July 14 and closes on Friday, July 16, 2021.

Zomato proposes to utilize the net proceeds from the fresh issue largely (Rs 6,750 cr) towards funding organic and inorganic growth initiatives and the balance amount is earmarked for general corporate purposes. Surprisingly, notwithstanding the mega public fund raising, none of the objects for which the net proceeds will be utilized have been appraised by any agency. This is how our regulators safeguard the public money in a disclosure era!  

While the company intends to utilise at least 40% of the net proceeds towards organic growth initiatives, it has not estimated specific amounts that will be deployed towards the objects of the offer. According to offer document, pending utilisation of the net proceeds for the purposes described, the company will temporarily invest the proceeds in deposits in one or more scheduled commercial banks. And, a part of the proceeds, if necessary, may be spent towards employee costs for retaining skilled personnel. In other words, Zomato does not mind spending shareholders’ capital contribution towards revenue expenses which no prudent management will do.

 

Lineage

Zomato’s offer document claims, the company has no identifiable promoter and it is professionally managed. Who formed the company?  According to the prospectus, Deepinder Goyal and Pankaj Chaddah were the signatories to the Memorandum, subscribing to 75,000 and 25,000 equity shares respectively on January 18, 2010. Six months later, in July 2010, the company allotted 10,527 shares to Deepinder Goyal as trustee of Foodiebay Employees ESOP Trust, 5,264 shares to Gunjan Patidar, 546 shares to Geetinder Goyal and 156 shares to Prashant Chaddah. Among these people, Deepinder Goyal has been designated as `Founder, MD & CEO’ and Gunjan Patidar as `Co-founder and Chief Technology Officer’. The company has given the designation of `Co-founder’ to three more people who have joined at different point of time and been with the company 3 to 9 years. Nevertheless, these so called co-founders’ stake in the company’s equity capital is not clear. 

The Founder-cum-MD, who has 5.5% stake in the company, can liquidate his holdings after the lock-in period of just one year. For the post of MD, he is entitled to a basic salary of Rs 3.5 cr per annum plus other perks. Upon termination of employment, `as a good leaver’, he will be provided a cash payment of Rs 1.75 cr within 30 days of cessation of employment and all his vested ESOPs shall become exercisable within the ‘exercise period’ and all unvested options shall accelerate and vest on the last date of employment. Strangely, the offer document also reveals that vide letter dated March 24, 2021 addressed to the Board, Deepinder Goyal has voluntarily waived his remuneration for a period of 36 months starting from April 1, 2021!

The company and its founder entered into umpteen number of investment agreements with several entities and raised nearly Rs 13,000 cr in 10 years though its equity capital was as tiny as Rs 3.51 lakh until March 2021! The loss-making company, which had collected a huge share premium of more than Rs 12850 cr, made a fabulous bonus issue in April 2021 in the ratio of 6669:1 thereby taking the equity capital to over Rs 235 cr. Post-bonus issue and conversion of all preference shares, the equity capital leapt to Rs 666 cr!  When and how the large equity capital will be served? The management does not want to answer, blaming the SEBI guidelines. As per SEBI Regulation, they can talk about  the past and the present but can’t say anything about the future!     

 

Key Management

Zomato’s board has eight directors comprising of one Executive Director, two Non-Executive Nominee Directors and five Independent Directors including four women Independent Directors. Kaushik Dutta (59), who has reportedly been retained as an expert on corporate governance by the Indian Institute of Corporate Affairs of the Ministry of Corporate Affairs in matters relating to future of corporate governance in India, is designated as the Chairman and Independent Director. Interestingly, until February 26, 2021 he was on the board of Zomato as a Non-Executive Nominee Director, representing the largest shareholder of the company namely Info Edge.

Zomato’s Founder-Managing Director Deepinder Goyal (38) had worked with the management consultancy firm Bain and Company. Aparna Popat Ved (43), who joined the company on April 19, 2021 as Independent Director, is a professional badminton player. Gunjan Tilak Raj Soni (41), who also joined April 19, 2021 as Independent Director, is currently the chief executive officer of Zalora Group. Earlier she had associated with Myntra Jabong India, Star India and Mckinsey & Company. Sutapa Banerjee (56), who joined the board on April 12, 2021 as Independent Director, had worked at ABN AMRO Bank and Ambit Capital. Namita Gupta (42), another Independent Director appointed on March 1, 2021, had previously worked with Facebook and Microsoft   and subsequently founded Airveda Technologies.  

The founder-director of Info Edge, Sanjeev Bikhchandani (59) is now on the board of Zomato as a Nominee of Info Edge. Douglas Lehman Feagin, who had worked with Goldman Sachs Group for more than two decades, and currently associated with Ant Group, is representing Alipay U.S. on the board of Zomato. The so called professionally-managed loss making company has fixed an annual remuneration of Rs 24 lakh to each of the Independent Director, besides sitting fees of Rs 1 lakh per board/committee meeting.

Besides the professionals-dominated board of directors, Zomato has few senior executives to look after the day- to-day affairs of the company. The co-founder, who holds a bachelor’s degree of technology in textile engineering from the Indian Institute of Technology, Delhi and  who joined the company a day after incorporation (January 19, 2010), Gunjan Patidar,  is currently the chief technology officer of the company drawing an annual remuneration of Rs 1.5 cr.

Another co-founder, Akriti Chopra – a CA earlier associated with auditing firm PricewaterhouseCoopers, who joined Zomato in November 2011, was appointed as Chief Financial Officer in November 2019. On the eve of the public issue, in June 2021, her designation has changed to Chief People Officer. During fiscal 2021, she was paid a gross remuneration of Rs 1.62 cr.

Surobhi Das, who holds a bachelor’s degree of architecture from the School of Planning and Architecture, New Delhi and a post graduate diploma in management from the Indian Institute of Management, Ahmedabad, is currently the head of customer experience at Zomato. She had first joined the company in July 2011 and left in May 2018. She re-joined Zomato in August 2020 drew a remuneration of 55.8 lakh for seven and a half months. Incidentally, like the founder-MD, prior to joining Zomato, she worked with Bain & Company.

Zomato’s head of human resources, Daminee Sawhney, first joined the company in February 2011 and left in November 2011. She re-joined Zomato in December 2012. During fiscal 2021, she was paid a gross remuneration of Rs 1.34 cr. She holds a master’s degree of science in international employment relations and human resource management from the London School of Economics and Political Science, United Kingdom. Prior to joining Zomato, she had worked with Radisson MBD Hotel.

Gaurav Gupta has been designated as a co-founder though he joined Zomato five years after incorporation, in 2015. He holds a bachelor’s degree of technology in chemical engineering from IIT, Delhi, and a post graduate diploma in computer aided management from IIM, Calcutta. Prior to joining Zomato, he worked with A.T. Kearney for over a decade. During the fiscal 2021, he was paid a gross remuneration of Rs 3.7 cr. At Zomato, his designation is changing frequently. Initially he was a co-founder and chief operating officer. In March 2019 he was just a co-founder. In March this year, he has been designated as co-founder and the head of supply.

Though working with Zomato since April 2017, Akshant Goyal, who holds a bachelor’s degree of engineering in computer science from the University of Delhi and a post graduate diploma in management from IIM, Bangalore, became Chief Financial Officer only in November 2020. Prior to joining Zomato, he reportedly worked in different roles with Kotak Mahindra Capital and a fin-tech start up. During fiscal 2021, he was paid a gross remuneration of Rs 3.26 cr.

Rahul Ganjoo, who holds a bachelor’s degree of engineering in computer science from the University of Pune and a master’s degree of science in software engineering from the Birla Institute of Technology & Science, Pilani is currently the head of food delivery at Zomato. He joined the company in August 2017. Prior to joining Zomato he reportedly worked  over 16 years in different roles with Wipro Limited, ThoughtWorks Inc., Symantec Corporation, SAY Media (formerly SixApart), Twitter Inc., and Jasper Infotech (Snapdeal). During F Y2021, he was paid a gross remuneration of Rs 2.9 cr.

The current head of new businesses, Mohit Gupta, is also designated as a co-founder though he joined the company only three years ago (July 2018). He holds a bachelor’s degree of engineering in mechanical from Sardar Patel University, Gujarat and a post graduate diploma in management from IIM, Calcutta. Prior to joining Zomato, he worked over 19 years in different roles with Pepsi Foods and MakeMyTrip. During F Y 2021, he was paid a gross remuneration of Rs 3.88 cr. Like Gaurav Gupta, the designation of Mohit Gupta is also changing frequently. Originally he was appointed as chief executive officer, food delivery in July 2018. He was awarded the status of co-founder in May 2020 along with the designation of chief executive officer, Food Delivery. Come October 2020, he became co-founder and the head of new businesses.

A noteworthy aspect of fat pay master Zomato is, except for Gunjan Patidar (28,877,000 equity Shares) and Deepinder Goyal (369,471,500 shares), none of the Key Managerial Personnel, including the so called co-founders, holds any equity stake on the date of the Red Herring Prospectus. Also, employee cost is one of the major overheads for Zomato. As of March 31, 2021, the company had over 3,700 employees whose cost amounted to over Rs 740 cr on revenue of Rs 1,994 cr.

 

Stakeholders

About 96% of Zomato’s present equity capital is of Rs 666 cr is widely held by 73 shareholders under the public category. The balance is held by the employees’ trust. Except Info Edge (18.5%), Alipay and Antfin (together 16.5%), no shareholder controls 15% or more of the voting rights. Of the 74 shareholders, 18 are holding more than 1% each. The pre-offer holding of the Selling Shareholder Info Edge is 1,244,029,200 shares at a nominal cost of Rs 1.16 a share. Post-offer, Info Edge will hold 119.46 crore shares (15.23% on the enlarged capital of Rs 784 cr) at negative cost.  As the entire existing equity holding is coming under public category, the maximum duration of the lock-in period is only one year. 

 

Business Model

Zomato is a strong consumer brand recognized across large and small Indian cities. Its technology platform connects customers, restaurant partners and delivery partners, serving their multiple needs. Customers use Zomato platform to search/discover restaurants, read/write reviews, upload photos, order food, book tables and make payments while dining-out. Zomato claims to provide restaurant partners with marketing tools to acquire customers. It also operates Hyperpure, wherein it supplies ingredients to restaurant partners. It provides delivery partners earning opportunities. As of March 31, 2021, Zomato was reportedly present in 525 cities in India, with 389,932 active restaurant listings. Its mobile application is claimed to be the most downloaded food and drinks application in India in each of the last three fiscal years since 2019.

Zomato generates a major part of its revenue from food delivery and the related commissions charged to the restaurant partners for using its platform. Restaurant partners also spend for advertisements on its platform. Zomato has invested significantly in sales and marketing activities to promote its brand and services. It has incurred advertisement and sales promotion expenses of Rs 81 cr, Rs 1,236 cr, Rs 1,338 cr and Rs 307 cr, respectively, in fiscals 2018, 2019 and 2020 and in the nine months ended December 2020, respectively. Such advertisement and sales promotion expenses represented 16.6%, 88.4%, 48.8% and 22.4% of its total income in the corresponding periods.

While Zomato had a footprint across 23 countries outside India as of March 31, 2021 through its foreign subsidiaries, it has now taken a conscious decision to focus only on the Indian market.

 

Financial Track

Even though the 11-year-old company enjoys considerable brand popularity in the country, it has a history of net losses and anticipates increased expenses in the immediate future. The company’s accumulated deficit has mounted up to Rs 5600 cr at the end of fiscal 2021.  The company’s operations are continuously ending up at negative cash flows.

Whereas the company’s operations are deep into red, it has already raised a huge share premium of over Rs 12,000 cr from corporates/venture capital & private equity funds. It has a bloated equity base of Rs 666 cr which will be enlarged further to Rs 785 after the public issue. If the current performance is any indication, one cannot expect the company to service its ultra-large equity capital in the foreseeable future.          

Zomato Consolidated Financials (in Cr)
Period Ended	Mar-21	Mar-20	Mar-19	Mar-18
Revenue	1994	2605	1313	466
Operating Profit	-792	-2427	-1044	-92
OPM%	-39.7	-93.2	-79.5	-19.8
Other Income	125	138	85	21
EBIDTA	-667	-2289	-959	-71
EBIDTA %	-31.5	-83.4	-68.6	-14.7
Interest	10	13	9	6
Depreciation	138	84	43	29
Net Profit	-816	-2386	-1011	-107
Accumulated Loss	5600	4666	2262	1291
Equity (Implied)	785	0.03	0.03	0.03
Reserves (Implied)	21890	5124	4619	2318
Borrowing	1	1	1	1
Fixed Assets	23	37	40	6

 

Valuation        

As if exploiting current primary market scenario, the heavy loss making Zomato is asking a price of Rs 76 for Re 1 paid-up share. In other words, the asset-light organization demands a market capitalization of nearly 60,000 cr which cannot be justified by the company’s financial track record. According to the management, (a) Strong network effects driven by unique content and transaction flywheels; (b) Widespread and efficient on-demand hyper-local delivery network;(c) Technology and product-first approach to business; and (d) Strong consumer brand which is recognized across the length and breadth of India are some of the qualitative factors and strengths which form the basis for computing the offer price. The offer document claims that the offer price has been determined by the company in consultation with the selling shareholder and the managers on the basis of assessment of market demand from investors for equity shares through the book building process, and is justified in view of the above qualitative parameters.

The management’s argument may perhaps hold some water during boom time like the present one. But, will the valuation sustain when the markets take a turn?  In 2015, two high profile brand-driven IPOs hit the market with much fanfare though their operations were into losses. Mumbai-based Adlabs Imagica demanded a market capitalization of Rs 1,438 cr and Bengaluru-based Coffee Day asked for a valuation of more than Rs 6750 cr. Imagica Investors have suffered a capital loss of over 95% and Coffee Day has inflicted a loss 87%.  

HOW LOSS-MAKING HIGH PROFILE BRAND IPOs PERFORMED ON THE TRADING SCREEN
COMPANY	IPO DATE	IPO PRICE	LISTING DAY	HIST. HIGH	HIST. LOW	CUR. PRICE	CAP LOSS%
Imagicaa	10-Mar-15	180	191.25	207.05	1.82	8.03	95.5
Coffee Day	14-Oct-15	328	313	374.60	14.05	43.6	86.7

Both Imagicaa and Coffee Day had enough assets to back the valuation yet, the companies’ valuation could not sustain in the face mounting losses. In the case of Zomato, the company neither has asset base nor has earnings to warrant such ridiculous valuations. Moreover, those two companies failed despite having strong promoters. Will the so called professionals, who work for fat salaries and perks, steer Zomato out of losses and safeguard the interests of the public investors?  The IL&FS episode is an alarm bell for the investing public.  

HOW ZOMATO COMPARES WITH OTHER BRAND-DRIVEN IPOs
Financials
(Amount in Cr)	Zomato	Coffee Day	Imagicaaworld
Market Cap	59623	921	71
Borrowing	1	751	1078
Fixed Assets	23	939	812
Revenue	1994	853	22
Other Income	125	128	25
EBIDTA	-667	-159	-10
Interest	10	261	163
Net Profit	-816	-652	-269
Equity Cap (Implied)	785	211	88
Reserves (implied)	21890	3505	845
Acc. Loss	5600	0	706
Stock Features
Current Price (Rs)	76	44	8
Face Value (Rs)	1	10	10
Book Value	21.76	175.91	25.81
Promoter Stake %	0	53.9	50.1
Discounting
Price/Book Value	3.5	0.3	0.3
Price/Revenue	29.9	1.1	3.2
Price/Fixed Assets	2553.4	1.0	0.1

 

Concern

• The company has no definite plans to deploy the IPO proceeds though it proposes to raise a large amount of Rs 9000 cr. Further, the management admits that it cannot assure the deployment of funds within the five financial years from listing of shares, as currently intended.
• Since the funding plan has not been appraised by any external agency, the entire fresh issue amount is left to the discretion of the professional management whose financial stake is very low.
• In absence of promoters’ equity, following the lock-in period of one year, the stock may face heavy selling pressure as there will be excess liquidity in view large equity base.
• The professional management’s corporate governance record is so pathetic that it could not preserve certain papers with regard to rights issue, allotment of shares, renunciation letters, regulatory filing records, etc.