Key takeaways from Zomato's Rs. 8,250 crore-worth IPO
Food delivery platform Zomato Ltd filed its Draft Red Herring Prospectus (DRHP) with Securities and Exchange Board of India (SEBI), heralding its Initial Public Offering (IPO) amounting to Rs. 8,250 crore. It is split between the company's issual of equity shares totaling Rs. 7,500 crore. The remaining Rs. 750 crore includes the early investor Info Edge India Ltd selling its stake through the IPO.
Interestingly, Zomato is also hedging against the IPO's failure by accepting pre-IPO placement capped at the maximum amount of Rs. 1,500 crore at a final price decided by the company. This arrangement allows investors to purchase company's stocks usually at lower value and is a means for the company to minimize the risk of IPO failing to achieve targets.
Last year, Zomato co-founder and CEO Deepinder Goyal had informed employees of the IPO plan in the first half of 2021. Goyal expects the food delivery sector to exhibit a strong growth in the foreseeable future, and will in fact accelerate post vaccination as the country limps back to normalcy. He also emphasized Zomato's low burn rate and accelerating market share across all regions.
Even before Zomato's 2021 target for IPO, it managed to secure funding from investors such as Tiger Global a couple of months ago. The food delivery service raised $250 million from that investment round, which raised its valuation to $5.4 billion. That was prior to last year's $660 million primary investment round that had pegged its valuation at $3.9 billion.
"We expect our costs to increase over time and our losses will continue given significant investments expected toward growing our business," said Zomato in its DRHP, while stating its desire to divert funding toward organic and inorganic growth.
Zomato stated that it will use 75 percent (Rs. 5,625 crore) of its expected IPO proceeds to fund organic and inorganic growth. The former includes ramping up customer acquisition, investing in delivery network, and shoring up technology infrastructure. The inorganic growth activities include seeking out acquisitions and other strategic initiatives. A good example of this was its 2020 acquisition of Uber's food delivery business.
Zomato's SEBI filing revealed an impressive year-on-year operations revenue growth from Rs. 466 crore in FY17-18 to a whopping Rs. 2,604 crore in FY19-20. The company's growth trajectory soared even higher last year owing to the rising demand for food delivery services on account of the pandemic combined with the eventual easing of lockdowns which left brick-and-mortar food establishments slow to recover.
Zomato's principal investor Info Edge revealed that the IPO offering of fresh equity shares also includes its proposed offer for sale. The former's stocks value increased by three percent to Rs. 5,060 today as a consequence. Of Zomato's total capital gain from the IPO, the split includes a fresh issue of Rs. 7,500 crore, with Rs. 750 crore being Info Edge's stake.