Ambit - Zomato - PRE-IPO Note - Sky Is The Limit - 05may2021

Zomato
NOT RATED
PRE-IPO NOTE May 05, 2021
Sky is the limit? Internet Classifieds
Zomato’s listing is a watershed moment for investors as they can now IPO Information
own a large and scalable Indian tech play. Indian foodtech is much Dec’21 data ` mn
smaller than China/US but our market opportunity is smaller than that
Number of shares(mn)# 6,661
of China due to affordability issues and absence of 996/takeout
spending. But absent funding constraints ($1.7bn capital raise since No of shares post issue(mn)# 7,762
Nov-20), we expect Zomato to double down on user growth and build in Issue size 82,500
30% FY22-26E revenue CAGR (22% earlier). Zomato is aggressively O/w: Offer for sale 7,500
creating adjacent monetisation streams like HyperPure (new business Ambit target valuation* (`/share) 68
globally). With up to 60% of US$1bn fresh capital raised for inorganic
Our fair value estimate 532,577
growth opportunities, investors must probe management on likely
acquisition candidates. 11.5x FY23E target P/S, 130%/45% premium to P/S (FY20) 20.4
Meituan/Doordash is for Zomato’s superior growth trajectory. Money Founder’s Stake* 4.87%
managers’ need to own and showcase India tech exposure may InfoEdge’s Stake* 15.0%
outweigh questions on economics and scalability, potentially leading to Ant Financials’ Stake* 14.5%
IPO pricing far in excess of our target valuation.
Employees* 5.5%
Affordability is the big question mark to the top-down rosy narrative Public stake post-IPO 13.8%
India’s spend on food consumption is 1/4th of India’s GDP (2019, source: Board seats 8 , o/w: 5 IDs
Zomato DRHP). Of this only 10% is on food services (delivery and dine-out) vs.
InfoEdge and Alipay can nominate
54/58% for US and China. Affordability and low women’s labour force 1 director each till their stake is above 7.5%
participation are reasons for this. We believe the relevant TAM for food services
Source: Ambit Capital research, DRHP, *-Stake post IPO
is 170-190mn vs. Zomato’s 42mn/11mn monthly active users (MAUs) and assuming IPO at our valuation # - assuming our
monthly transacting users (MTUs) and Meituan’s 511mn MTUs. valuations Note: Lock-ins of various stakeholders (a)
Lock in period for all shareholders of one year except (b)
Zomato’s execution - mostly top-notch with a few glitches those held in ESOP/Category I/II AIF/FVCIs (c) equity
shares allotted to anchor investors for 30 days
Prior to setting up food delivery in India, Zomato attempted to inorganically
scale up the classifieds model in ~23 countries. But this didn’t work and Zomato
wrote off its overseas investments, choosing to focus on India. Despite a late Summary of global comparables
start Zomato blitzscaled and achieved market leadership burning less capital Company Users(mn) Orders(mn)
than nearest rival Swiggy. Meituan 511 10147
Valuations will remain elevated due to demand-side factors DoorDash 20 816
Despite adjusting for Indian conditions, we believe food delivery offers Zomato JustEat 60 588
the opportunity to drive >20% revenue CAGR for over a decade (~18% earlier). Zomato 11 403
60% target valuation upgrade is driven by vastly improved capital availability Grubhub 31 227
(thus lower WACC), enabling Zomato to weather potential competition and
rapidly create the market. Key risk is continuous competitive challenge from
Swiggy, new entrants like Amazon and business model disruptions (e.g. Dotpe).
Key questions for management
(i) Why did MTUs plateau at 11mn in Sep-19? How can company increase this?
(ii) User behaviour and economics in metros vs. other markets. (iii) Up to 60% of
fresh proceeds for inorganic growth opportunities. What are areas that Zomato
is eying? (iv) Thoughts on competitive challenges across food delivery and
Hyperpure businesses. (v) Regulatory risks, especially in regard to contractors.
Key operating, financial and valuation metrics*
Year-end March FY19 FY20 FY21E FY22E FY23E Research Analysts
Net Revenues (Rs mn) 13,126 26,047 20,980 32,913 46,305
Vivekanand S, CFA
EBITDA (Rs mn) (22,435) (23,047) (699) 1,979 6,091
+91 22 6623 3261
Active users (mn) 29 42 34 48 57
vivekanand.s@ambit.co
Restaurants offering delivery (‘000s) 94,286 143,089 135,935 149,528 164,481
Contribution margin -11% 8% 6% 7% Deep Shah, CFA
Non-delivery revenue proportion 26% 20% 23% 27% 29% +91 22 6623 3064
P/S (x) 41 20 25 16 12 deep.shah@ambit.co
Source: Company, Ambit Capital research; ATV = Average Transaction Value, *post-money
aditi.sharaf@ambit.co
Ambit Capital and/or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may
have a conflict of interest that could affect the objectivity of this report. All Investors including US Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers and Disclosures at the end of this Report.
Zomato
The Narrative in charts

Exhibit 1: Zomato is creating an entire ecosystem around the restaurants and food
ordering customers
Zomato
Restaurants +
Only Restaurants Only customers
Customers
Source: Ambit Capital research, Company
Exhibit 2: Contribution/order remained negative as Exhibit 3: …but FY21 saw drastic improvement in all
company focused on expansion in FY20... metrics to record positive contribution
80 100 Customer
Customer 90 delivery fee
60 delivery fee
80
15 27
70
40
-45
60 Other
Delivery
44 Discounts variable
20 cost 50
Discounts Commission cost
Other 40 Delivery
0 -52 variable 63 cost
30 -7 -15
Commission cost
20
-20 -22
-16 10
-40 Net Contribution is MINUS Rs31/order 0 Net contribution is Rs23/order
Source: Ambit Capital research, Company Source: Ambit Capital research, Company
May 05, 2021 Ambit Capital Pvt. Ltd. Page 2

Zomato
Exhibit 4: Indicative business model of disruptors like Dotpe in India
Source: Ambit Capital research
Exhibit 5: Comparable valuations of global food tech players
70 DeliveryHero
Revenue CAGR (2019-2022)
60
50
40
JustEat
30
Meituan
20 Zomato
DoorDash
10
0
0 2 4 6 8 10 12 14
P/S (2022E)
Source: Ambit Capital research, Company, Bloomberg, * - Bubble reflects the total number of orders

Zomato
Affordability mars rosy top-down narrative

Like most markets, a naïve top-down analysis can lead investors to compare
India with more evolved markets like China and the US. But a closer look
leads us to believe that factors like lower female labour force participation
and affordability challenges imply that all current and future smartphone
users aren’t the catchment area for food-tech services. Our assessment leads
us to believe that the target market for these services could be 170-200mn in
5 years.
Understanding the market

The most sought after and the most debatable point with the online food delivery
ecosystem is the market size itself. Global comparisons are the easy way out, but fail
to account for the multiple nuances. Empirical evidence also fails as it doesn’t account
for changing consumer preferences and never before seen digitization. We therefore
take a mixed approach to segment the user base for the food delivery services using
multiple parameters.
 Food delivery companies have spread their operations to over 500 cities. With
only 718 districts in India, it would be fair to assume that large swathes of the
urban population has been covered.
 However, this still means that the addressable population is not more than This is where copying the trends of
320mn-340mn (World Bank estimates ~465mn urban population in 718 districts) China may result in erroneous
given the predominant rural split of population. China has an urban population results.
base of ~840mn people, or over 60% of population.
 There is an acute problem of urban poor in India. Even as per the low barrier of
poverty line (government estimates), over 81mn of urban India is poor. The This is where copying the trends of
effects of pandemic on lower middle class would be catastrophic. Assuming USA may result in erroneous
similar number of lower middle class users who are unlikely to afford these results.
services, we arrive at a user base of ~150mn of urban users who aren’t the right
target market for food delivery companies in the near to medium term.
 Thus, we arrive at a potential user base of 170mn-190mn users, i.e. 40mn-50mn
families which could be the ideal potential audience for food delivery companies
in India over the next 5 years.
Exhibit 6: Breakup of the total market size for food delivery apps

Zomato
Does this imply increase in repeat order is the holy grail?

It makes a lot of sense to create exclusive or super user cohorts in India, where
average order value is low and the large market size is an optical illusion. It also
leads to densification of orders and thus efficient use of delivery fleet. We think that
given the ease of use of the two apps, multi-homing is common, implying minimal
exclusive users on either Swiggy or Zomato. Thus, it makes lot of sense to push for
loyalty packs like Swiggy Super or Zomato Pro.
Another key component for food delivery companies to grow scale is to push for more
active transacting users. Whilst Zomato has over 42mn monthly active users, only
11mn are monthly transacting users even in pre-pandemic times of FY20. This
difference may be lower for Swiggy as users flock to Zomato for lot more than
delivery. India already has one of the highest rates of order per user per month rates
globally. This is due to a small base of users currently relative to overall market size.
Exhibit 7: Zomato has one of the highest frequency of ordering
Particulars Country Total users (mn) Total orders (mn) Order/mo/user
DoorDash USA 20 816 3.40
Zomato India 11 403 3.14
Meituan China 511 10,147 1.65
JustEat Takeaway Global 60 588 0.82
Grubhub USA 31 227 0.61
There are multiple considerations to be noted on the above table:

 As the company achieves scale, it would expand its user base. This would imply
reduction of average order per user but increase total users and total orders. This
can be understood as Zomato remains relevant to existing users’ family post
pandemic, there would be more than one transacting user from the same family.
 The consumer orders per month would not be too different for Swiggy in all India’s food delivery market is in a
likelihood. Thus, one must consider ~7orders/month being done by the Indian nascent stage. Companies need to
user while extrapolating growth in number of orders. focus both on user acquisition and
encouraging repeat usage.
 Another peculiar feature of the Indian market is the women labor force Abandoning any one won’t work.
participation rate. This remains abysmally low at ~20%. This is ~60% in China This would call for continued
and ~57% in USA. This explains the two core things plaguing the India’s food investment for market expansion.
delivery ecosystem - low transacting users as only a part of smartphone users are
attracted by convenience and low average order values (rarely wholesome meals
are ordered for the entire family).
The known unknown market opportunities

It would be naïve to assume that Zomato and Swiggy are food delivery apps and
nothing else. They are large sources of data repositories. They have working
knowledge and operational intelligence of last mile logistics, and that can be
leveraged into multiple new avenues. Ascertaining the market value or the market
size today of these opportunities is a shot in the dark. But they have already started to
venture out into adjoining and newer spaces to leverage the large investments made,
with each company following its own model. However, it can be safely assumed that
even if certain of these initiatives result to be duds, the success of a few would be
moonshots. We discuss in detail about the same subsequently.

Zomato
Zomato focused on restaurants; Swiggy on urban convenience

Zomato and Swiggy have taken on divergent paths to leverage their existing
stronghold in the food delivery space.
 Zomato is focused on creating an entire food ecosystem, where it controls the
entire restaurant supply chain by providing it ingredients to delivering the final
product. The former is done via HyperPure, an acquisition made by Zomato in
FY19. It supplies ingredients to ~6K restaurants today.
 It also provides table reservation services to customers by tying with restaurants,
resulting in a win-win proposition. It bought a US-based table reservation
company known as NexTable in 2015.
 Zomato, being originally a classifieds portal, has an established advertisement
revenue model. Restaurants can advertise on Zomato for better awareness. This
business has been dwarfed by revenue from food delivery.
 It has further ventured into lunch-tiffin market for offices, via acquiring
TongueStun in FY19. This business has been hurt by lockdowns.
 It organized events like Zomaland to create an offline buzz and branding, along
with providing restaurants stalls to offer their food and advertise to the premium
youth audience. Akin to TongueStun, this business was hurt by the lockdown.
 The latest venture that Zomato has entered into is financing. This is the biggest
disruption it can cause, as there is no better underwriter for restaurant loans
other than Zomato/Swiggy. This could be a game changer if it succeeds but we
haven’t factored it into our assumptions.
That said, our BFSI team believes that there is likely to be no better player in the
ecosystem than food tech players to assess the risks of lending money to
restaurants. This is especially true for restaurants that have a very high
dependence on foodtech.
Exhibit 8: Zomato is creating an entire ecosystem around the restaurants and food
ordering customers
Zomato
Restaurants +
Only Restaurants Only customers
Customers


Zomato
Swiggy on the other hand has expanded to provide an all-encompassing delivery

offering. It has thus forayed into everything associated with delivery. This makes
sense as the company is just working on its already established systems. Secondly,
the delivery fleet utilization is much better during the lean period of restaurant
orders. They have launched products like Swiggy Genie, which essentially competes
with Dunzo in India. It has also ventured into delivering groceries, fresh foods, books
and pet care items. In fact, Swiggy has also collaborated with Ministry of Housing and
Urban Affairs (MoHUA) under PM SWANidhi scheme to take roadside vendors online
and deliver their products.
We can thus summarize this opportunity market as under:
The GOOD:
Restaurant food (or food services) accounts for only 10% of India’s spend on food.
This has massive growth tailwinds due to urbanization, convenience and increase in
choices. The post-pandemic era could further increase rate of formalization due to
focus on hygiene. There are not many food brands in the Indian landscape. India
merely has a handful of national brands with ubiquitous presence compared to over
175 in USA. This helps in two ways - it is easier to hold on to high margins in a
fragmented space and creation of in-house brands via cloud kitchen is possible.
The NEUTRAL:
The high AOV orders are led by stay-at-home trends due to pandemic. There are also
luxury restaurants which have flocked to delivery platforms to stay afloat. It is unclear
whether these trends would sustain post-Covid. Zomato will have to encounter a
tradeoff, whether to further deepen the market at the cost of profitability, or grow the
market grow at a slow pace whilst pursuing positive contribution/order economics.
The BAD:
The market is a duopoly but with a well-capitalized and private competitor. Unlike
Zomato, where large shareholders are unlikely to capitalize the business, Prosus, 40%
shareholder of Swiggy, has continuously funded the latter. Since Zomato is reliant on
public market investors for funding, Swiggy could force Zomato into a price war,
depressing its valuations and hence affecting its ability to raise capital and survive a
prolonged war of attrition. Thus, the path that Zomato can take is a function of
whether Swiggy chases growth or profitability. Chasing growth will lead to cash burn
whilst chasing profitability will incentivize competitors like Amazon.
 India’s female workforce participation rate is abysmally low at 20% compared to
US/China at 57%/60%. This really moves the needle in terms of repeat orders
from developed users.
 The high-volume businesses like meals at office too are a challenging market
owing to the presence of large informal players (whose accuracy is higher than
formal players) and existing kitchen infrastructure. This coupled with the fact that
customers are price sensitive implies that this segment is a tough nut to crack.

Zomato
Zomato: A blitzscaling success story!

Zomato started off as a restaurant discovery platform in 2008. It set out to
digitize the menus of restaurants. The business model was advertising as it
provided visibility to restaurants. It entered into over 25 global markets with
the advertising model and expanded to services like aiding table booking. It
Zomato never ventured to be a full
reluctantly embraced food delivery as Swiggy forced it to walk down this very
stack model – But it adapted
capital-intensive path. It initially experimented with leveraging restaurants’
quickly as market demanded and
own delivery fleet before acquiring Runnr in 2017 and creating its own in-
executed the delivery piece of
house delivery infrastructure. There was no looking back since then, as it
business in a stellar fashion.
raised its first large check of US$150mn in Feb-18 and US$210mn in Oct-18.
With cumulative cash raise of over US$1.5bn and presence in over 500 cities,
Zomato has become a household name today and is embarking to create an
entire ecosystem pivoting around the restaurants.
“When a start-up matures to the point where it has a killer product, a clear and sizable
market, and a robust distribution channel, it has the opportunity to become a “scale-
up,” which is a world-changing company that touches millions or even billions of lives.
Often, the fastest and most direct path from start-up to scale-up is the hypergrowth
produced by blitzscaling.”
― Reid Hoffman, Blitzscaling: The Lightning-Fast Path to Building Massively

Valuable Companies
Exhibit 9: Key events in the history of Zomato

Year Event
2008 Zomato start its operations as a restaurant discovery portal
2011 First institutional fund raise
2015 Record international acquisitions reach all time high, with UrbanSpoon acquisition
2015 First steps into food delivery space - The beginning of a full stack model
2016 Launch of table reservations in India
2017 Launch of Zomato Pro
2017 Became profitable basis advertisement revenues itself
2018 Had to participate in the delivery space, acquired Runnr to build in house delivery fleet
2018/19 Zomato expands to over 200 cities
2019 Launched HyperPure to provide ingredients to restaurants
2020 Acquisition of food delivery business of Uber Eats in India and reach exceeds 500 cities
2021 Ventured into providing loans to restaurants.
Key terminologies essential to understanding Zomato

Understanding GOV/order and its trajectory
Zomato has clocked a massive increase in its GOV/order in 9MFY21 due to multiple
reasons, led by the stay-at-home rules during the pandemic. Whilst the order run-
rate dipped, large orders became frequent. This enabled Zomato to have higher GOV
in 9MFY21 compared to FY19 despite processing only ~81% of FY19 orders. This
also indicates that users placed orders for their families during the pandemic instead
of ordering individually.

Zomato
Exhibit 10: Zomato GOV saw rapid growth in GOV in Exhibit 11: …due to increase in orders/GOV per order
FY20/9MFY21... respectively
Rs bn mn 500 Rs
GOV No of orders (RHS)
394 408
120 500 378
400
100 400 282 278
300
80
300
60 200
200
40
100 100
20
0 - -
FY19 FY20 9MFY21 FY19 FY20 1QFY21 2QFY21 3QFY21
The interesting bit to note in the chart is stagnation of GOV during FY19 and FY20.
The company expanded to 200 cities in FY19 and 500 cities by FY20. Spends by new
users tend to be lower due to geographical location. This is different from their
overall contribution to GOV, which we would see later in user cohort and GOV
analysis. The sharp increase in GOV per order in FY21E was due to families all
staying within a single roof, increasing the overall spend in every order delivered.
This is unlikely to sustain as the country opens up. It isn’t clear whether the data
includes grocery ordering GOV or not as the company hasn’t clarified the same in its
DRHP.
But what exactly in Gross Order Value?

Zomato describes its Gross Order Value (GOV) as under, which we take from its
DRHP.
“Total monetary value of Orders including taxes, customer delivery charges, gross of
all discounts, excluding tips.”
This implies that GOV is not the accurate representation of any of the following:
 The value of food which is processed through Zomato
 The customer wallet or customer spends on Zomato
 The amount on which Zomato earns its commission
Thus, we try to figure out a better metric of ascertaining the overall value of food per
order on Zomato platform. This is essential as the commission is earned on this figure
and not on reported GOV, which includes items like taxes and delivery fees. The
computed figure is also an overstatement, as it doesn’t exclude the discounts given by
the restaurants. However, to compute the figure on which Zomato earns commission,
one has to exclude from adjusted GOV the discounts given by restaurants (we haven’t
been able to compute that due to lack of data) and add back the discounts given by
Zomato (Rs7/order in 9MFY21).
Exhibit 12: Computing a more accurate figure of food spends per order on Zomato
Particulars FY20 9MFY21
Reported GOV/order 278 398
Less: Delivery fee 15 27
Less: Zomato discounts 22 7
Less: Taxes (5% GST) 12 18
Implied GOV 229 346
Source: Ambit Capital research, Company, Note – We have been able to do this only for FY20 and 9MFY21 as
unitaditi.sharaf@ambit.co
economics have been provided only for these two years

Zomato
How does Zomato’s accounting work?

There are three critical items to look into the income statement, i.e. revenues,
delivery costs and discounts. Rest of the costs are either fixed or semi-variable. We
thus focus on accounting methodology of these three elements.
1. Revenue
Reported revenue only includes the commission income earned by Zomato on the
orders delivered from the food delivery vertical. Other revenue items are Hyperpure
sales, advertisement revenue and Zomato Pro subscription revenues.
The delivery fee collected used to be included in revenues till Oct-19 when the
practice was changed to net it off from delivery costs paid to delivery agents.
Whilst the company has not disclosed the split of revenue, we can ascertain
Hyperpure revenue basis earlier disclosures and matching line item – Revenue from
sale of traded goods. The delivery revenue can be computed basis multiplying
number of orders and commission revenue disclosed per order in the DRHP.
Exhibit 13: Estimated revenue from various verticals for Zomato
Particulars (Rs mn) FY20 9MFY21
Total reported revenue 26,047 13,013
Implied delivery revenue(commission) 17,571 9,734
Implied other verticals revenue 8,477 3,279
o/w: HyperPure 1,076 1,244
O/w: Others 7,401 2,035
Source: Ambit Capital research, Company, Note – We have been able to analyse these metrics for FY20 and
9MFY21 as unit economics have been provided only for these time periods
2. Delivery costs
The expenses incurred in remunerating riders are recorded as outsourced support
costs. However, not the entire amount is expensed. Rather, the amount collected from
customers is netted off against the payments made to riders. We earlier saw that
delivery fee collected from customers is not included in revenue. Obviously, the We are surprised that there is no
payment made to riders is more than the delivery fee collected from customers. This separate line item for R&D costs in
net difference is expensed in the income statement. Given the unit economics the DRHP.
disclosure, we can compute the delivery income earned and the gross spends done.
Note that there is a case to be made for these spends to reduce as algorithms
become more powerful and order density increases.
Exhibit 14: Break-up of outsourced support costs
Reported cost 20,937 3,633
Implied delivery cost expenses 20,956 6,913
Implied delivery income 6,166 4,154
Cost booked in outsourced support cost 14,790 2,759
Implied other outsourced costs 6,147 874
3. Zomato discounts
The app offers three types of discounts to customers, i.e. restaurant only, restaurant
cum Zomato and lastly by card/payment companies. Out of this, Zomato only rightly
records discounts given by Zomato on its expense in its income statement. They are
reported under advertisement expenses. There has been a sharp reduction of this
discount along with increase in delivery fee. Whilst this has worked well during the
pandemic due to lack of options and hygiene concerns, it is likely that such measures
would have an impact on growth.

Zomato
Exhibit 15: Break-up of advertising and sales promotion costs

Total Advertisement cost 13,384 3,069
Implied Zomato discount cost 8,745 1,132
Implied other advertisement cost 4,639 1,938
What does this imply?

This detailed break-up of costs aids us to compute the semi-variable and fixed costs
in the business. This is essential to undertake breakeven analysis when things return
to pre-pandemic stage.
Exhibit 16: Basic evolution of fixed/semi-variable costs and breakeven orders
Contribution/order (Rs) (31) 23
Total Orders 403 155
Total Contribution (12,292) 3,550
Total EBITDA (23,047) (3,137)
Implied net results + fixed/semi variable costs 10,755 6,687
Implied breakeven order count at 9MFY21 contribution (mn) 292
o/w: Orders done (mn) 155
Whilst we have tried to compute the breakeven point here assuming a very
aggressive 9MFY21 contribution to margins, there are downside risks to our numbers
given: (i) reduced commission per order as GOV will fall and (ii) reduced delivery fees
or increased discounts if competition resumed. There is also an upside risk due to the
fact that number of orders will increase. We take up these matters in our valuations
section. It should also be noted that there is not enough margin on safety on
contribution. Reduction of average order value by 15% (very likely) can reduce
contribution/order by ~Rs10/order. This would then necessitate gargantuan number
of orders to break even.
Exhibit 17: Contribution/order remained negative as Exhibit 18: …but FY21 saw drastic improvement in all
company focused on expansion in FY20... metrics to record positive contribution
80 100 Customer
Customer 90 delivery fee
60 delivery fee
80
15 27
70
40
-45
60 Other
Delivery
44 Discounts variable
20 cost 50
Discounts Commission cost
Other 40 Delivery
0 -52 variable 63 cost
30 -7 -15
Commission cost
20
-20 -22
-16 10
-40 Net Contribution is MINUS Rs31/order 0 Net contribution is Rs23/order

Zomato
MTU and MAU are important KPIs

The reliance on advertising as a business model for over a decade has led to a large
mass of restaurants being listed for discovery but not for delivery. Given that the large
chunk of revenues and valuation resides on delivery volumes, we focus our analysis
on delivery restaurants. Similarly, there is a large mass of users that is active on the
platform on a monthly basis but do not transact. These are users searching for either
dine-in options, ratings or merely accessing the content pages around restaurants.
There is a case to be made to convert these users to transacting users as these are
low hanging fruits.
Exhibit 19: Zomato has rapidly grown its operating indicators
Monthly transacting users Monthly active users Active food delivery restaurants (RHS)
50 160,000
mn
140,000
40
120,000
30 100,000
80,000
20 60,000
40,000
10
20,000
- -
FY18 FY19 FY20 9MFY21
Cohort analysis – India is different from the world

User cohort analysis is a key part of understanding user behavior as they remain
longer on the platform. The analysis is basis overall GOV contribution via their
respective spends from Year 0 of joining. The old cohorts are accustomed to the
platform, and have been around for long, thus loyalty could be higher. They also
don’t require massive promotion spends to incentivize usage. Thus, cohort study is a
must. The global general trend is the later cohorts usually grow much faster, as they
are older internet users who are generally wealthy and are not deal seekers (unlike
early adopters). Once the platform is established, the relatively better-off consumers
become frequent users. Hence, the newer cohorts grow much faster and contribute
disproportionately.
Exhibit 20: DoorDash cohort analysis clearly points the increasing pace of growth in
later cohorts
Source: Ambit Capital research, Company(S-1)

Zomato
Our hypothesis is that the same is not true for India. The initial users of food delivery
in India were the already mature ‘India 1’ users. These were the urban users who
chose convenience over costs. As Zomato expanded, it had to incur massive costs to
get transactions from the deal seeker category of ‘India 2’ internet users. Zomato
GOV cohort clearly shows that FY18 cohort was far superior than FY19 cohort. This is
because Zomato expanded to 200 cities in FY19. We suspect that the FY20 cohort
would even be worse, where Zomato expanded to over 500 cities. Thus, one can’t
extrapolate the global case studies of later users contributing disproportionately to
growth. The only benefit of scale here is if Zomato is able to keep unit economics
positive, it can spread its fixed costs over a larger user base apart from leveraging
user data for newer initiatives.
Exhibit 21: Zomato cohort analysis suggests that the FY18 India 1 cohort was the best
ever
One flaw with the cohort analysis presented above is the 1.0x for the various cohorts
aren’t necessarily equal. We think that the 1.0x for FY17 could be a high number
given the service’s availability mostly in metros vis-à-vis FY19 cohorts who are likely
to be from smaller towns, where the food ordering unit spends could be lower. This
matters as Zomato’s economics heavily rely on the value of food ordered by the
users.
Zomato has struggled with its acquisitions

Zomato has massively scaled up in India and displayed inspiring execution to scale up
food delivery to over 500 cities within a short period of 3 years. However, they have
too fallen in the same trap earlier where they tried to expand in multiple geographies
but failed. The moonshot success of Zomato in India has allowed for failures, and the
company stayed afloat. They have rightly decided to focus only on India now as
global revenues are less than 10% of overall revenues, as disclosed in their DRHP.
Some of the prominent examples of large write-offs for Zomato have been as under:
 The acquisition of UrbanSpoon in 2015 for over US$50mn and shutting down its
operations within 5 months was a big jolt for the company at that point of time.
Zomato had mentioned that the critical asset was its user base, which migrated to
Zomato. However, it could never reach its envisioned goal to take on Yelp.
 Another US-based acquisition in 2015 was Nextable. The investment in Nextable,
including goodwill to the tune of Rs155mn, was written off in 2020.
 Zomato entered into food at work space via acquiring Tonguestun Food Networks
in 2019. This was a part of their strategy to create an entire ecosystem around
food delivery. Whilst the market opportunity was lucrative optically, the execution
was always a challenge. The pandemic made things worse, and thus another
write-off to the tune of Rs963mn was undertaken in FY20. Overall diminution to
value of equity was Rs1,313mn.
 Lastly, the company chose to write off its equity investments in multiple global
subsidiaries in FY21E financials.

Zomato
Multiple acquisitions along the journey

Zomato has done multiple acquisitions globally as it sought to expand its presence.
Interesting and peculiar about
While one measure to reckon the scale of investments is the sheer amount of equity consumer internet in general and food
investments in subsidiaries globally, which is now written off for good; we present delivery in particular: If the local
here the acquisitions made to either enter into a particular market or strengthen its business is well capitalized, the foreign
positioning in an existing market. The biggest of these acquisitions has been Uber players have an uphill climb.
Eats for over US$300mn all-stock deal. The biggest overseas acquisition is
UrbanSpoon for over US$50m in the USA market. Meituan/Ele.me in China-No
Exhibit 22: Details of acquisitions undertaken by Zomato competition; DoorDash –over 50% of
US market; JustEat/Deliveroo in UK.
Year Name Purpose
Cibando Italy expansion
Even where competition arose; the
Gastronauci New Polish market local player won!
2014 Obedovat New Slovakian market Grab – Uber in SE Asia,
Lunchtime New Czech Republic market UberEats/Foodpanda –
MenuMania New New Zealand market Swiggy/Zomato in India,
Urbanspoon US Market restaurant discovery portal Uber/Didi in China
2015 NextTable US market table bookings portal Delivery Hero is an exception where a
multi-country operator is winning.
Mekanist New market of Turkey
2017 Runnr Creation of in house delivery fleet
2018 ToungueStun foods Food @ Work offering
2020 Uber Eats Strengthening presence in Indian market
Source: Ambit Capital research, Company, *-This may not be an exhaustive list given lack of data disclosures.
Conclusion: Zomato emerged as a capital-efficient market leader in Indian

foodtech
Though it went through a very challenging journey, Zomato managed to scale up its
food delivery business with less cash burn than Swiggy. We believe that this was due
to its association with InfoEdge and its founder, Mr. Sanjeev Bikhchandani, who
would have emphasized frugality in its blitzscaling journey. Further, Zomato was
forced to be tighter as it was lacking a sponsor like Prosus, which made large
amounts of capital available to rival Swiggy on a regular basis.
Exhibit 23: Zomato vs Swiggy opex reflects Zomato's frugality
FY18 FY19 FY20
Particulars (Rs mn)
Zomato Swiggy Zomato Swiggy Zomato Swiggy
Revenue 4,660 4,170 13,126 11,283 26,047 26,960
Opex 5,584 8,020 35,561 34,953 49,094 66,040
EBITDA (924) (3,850) (22,435) (23,670) (23,047) (39,080)

Zomato
Large TAM would attract competition

Even with a focused market size assumption of 170-190mn users, there is
potential for the current food delivery market to continue growing at over
20% CAGR for the next decade. On its own, the food delivery market size will
be large enough to attract newer business models and competition. But the
mere fact of a large opportunity with a two-player construct (optical!) doesn’t
imply that the market participants have pricing power. This has been seen
multiple times in the short 3-year history of aggressive market development
already. The evidence of challenging growth in this large TAM is presented
below.
1. Number of orders stagnated in FY20
The overall number of orders grew from 191mn in FY19 to 403mn in FY20. However,
a closer look at the 1HFY20 press release of Zomato suggests that 214mn orders
were delivered in 1HFY20 itself. This implies that 2HFY20 saw delivery of 189mn
orders. Even if one is to adjust for the seven days of lockdown in FY20 and assuming
steady order rate, another 10mn orders could have been added. This was on the
backdrop of Zomato expanding into new cities. It expanded from 200 to 500 cities in
FY20. This simply implies that reduction of discounts and introduction of delivery fee
do have a direct impact on order volumes. One cannot assume growth for granted
just due to large TAM opportunity.
2. The logout campaign
300 restaurants under NRAI initiated a logout campaign in August’19 to protest
against the Zomato Gold offering. This gained nationwide momentum in Oct’19
when FHRAI also backed the same. The campaign ended eventually with certain
alterations to the Zomato Gold offering (now Zomato Pro). This was a case study of a
very fragmented industry coming together, but it eventually withered. However,
events like these coupled with large market size become breeding grounds for newer
business models. Zomato had actually planned to eliminate order-based commissions
from restaurants in 2017 when it didn’t use its delivery fleet. However, that couldn’t
last long as competition in delivery picked up.
3. New-age models are already here to potentially disrupt
The point of continued friction between restaurants and food delivery apps is the take
rate. India has one of the highest take rates in the world at 18-20%, a function of
very fragmented industry and low average order values. There have been already
models developed globally and in India, to create offerings for restaurants to reduce
or completely avoid such high take rates. We look at two companies here, namely
Olo in US (listed, US$4bn m-cap) and DotPe in India (unlisted, investors include
Google and InfoEdge) which are trying to circumvent these high commissions that
restaurants have to pay. The landing page of Dotpe is itself very clear in its value
proposition.
Exhibit 24: Dotpe has made it value proposition clear
Source: DotPe

Zomato
Whilst we do not deep-dive into their business models here, the concept is simple.
These businesses help restaurants create their own pages/websites, where order
experience UI can be as seamless as food delivery apps. Given that these apps do not
The core issue is lack of restaurant
charge commissions basis order value, restaurants would not increase the menu
discovery possibility and need for
prices on their website like they do on food delivery apps. This is where the consumer
top of the mind recall about the
already benefits. The delivery is undertaken by any delivery provider - it could be
restaurant for the users.
food delivery dashers itself or in India it is undertaken by Dunzo. Restaurant saves
commission, customer saves paying extra menu rate and delivery fees is anyways
charged by food delivery apps.
Exhibit 25: Indicative business model of disruptors like Dotpe in India
The answer to such offerings by DoorDash has been launch of DoorDash storefront,
where it gives out a separate page for the restaurant on their website. Lower
commissions are charged on such orders (DoorDash anyways has lower commissions
even for delivery). The idea is to retain the user and the restaurant, and leverage that
data to offer a lot more.
A peek into global players

We take a quick summary look at the global players and their scale. Needless to say,
India has one of the lowest average order values. The number of orders for Indian
companies are already past all global peers except the Chinese stalwarts. User
penetration remains low, and that provides room for sustained growth. In this note
we do not deep dive into specifics of each company’s models or ecosystems, but
provide a broad overview of the global space.
Exhibit 26: KPIs of global food delivery giants
M-Cap Users No of orders Take
Company Country
(US$bn) (mn) (mn) rate
Meituan* China 228 511 10,147 14%
DoorDash USA 46 >20 816 12%
DeliveryHero >50 nations 40 1,304 23%
JustEat >20 nations 15 60 588 23%
Grubhub USA 6 31 227 21%
Source: Ambit Capital research, Company, *Note-Meituan operates in multiple segments and not only food
delivery, thus m-cap is not comparable

Zomato
Some other prominent risks for Zomato related to high TAM

1. Positive unit economics vs breakneck growth
Zomato achieved over 400mn orders in FY20 and quarterly run-rate of over 70mn
orders in 3QFY21. The change has been a massive uptick in contribution margin in
the pandemic period as it virtually eliminated discounts and delivery fee became the
norm. The company has not given the split of the orders between geographies or
cohorts. However, it is very likely that sustenance of delivery fees may be difficult in
the last 200-300 cities once we are past the pandemic. This could force the company
to choose either revenue growth or positive unit economics.
2. The competitive intensity in the industry

The path adopted by the company could very well be directed by the competitive
space. Swiggy is already very well-funded and yet raising US$800mn. Media reports
indicate another US$400mn-450mn could be in the pipeline from Softbank. In this
scenario, should Swiggy increase discounts to pursue revenue growth, Zomato may
be left with no choice but to follow. Alternatively, both the players can decide to milk
the market rather than further deepening it and let it grow at organic pace. Whilst the
latter seems a happy solution, it also poses the threat of new entrants. Sustained
positive unit economics will incentivise the entry of Amazon as it may choose to burn
cash to pursue this large TAM. Whilst scaling up food delivery across pin codes isn’t
easy, we think that it is unfair to dismiss the execution prowess of Amazon. If Swiggy
and Zomato can blitzscale in 5 years, which included market incubation, Amazon
may very well emerge as a force to reckon with in the next 2-3 years should it chose
to do so.
3. Cloud kitchens
The lack of large branded chain restaurants in India make it a fertile place for cloud
or ghost kitchen. Whilst a single cuisine or a single shop cloud kitchen is at the mercy
of food delivery apps, companies which create multiple brands may not experience
the same compulsions to comply. Instead, they can turn the tables around. Rebel
foods with over 12 brands is the most prominent example here, and it already has
over 3.5K delivery locations. They have also opened up their platform for other large
brands. Having multiple cuisines also allows for selection for the consumer. Focused
and targeted strategy can aid better economics than the restaurant aggregators.
Exhibit 27: Rebel Foods has its own in-house multiple Exhibit 28: …and also provides facility to other brands to
brands... join its platform
Can Zomato be a super app?

We had laid the criteria for a super app in our Jio platforms initiation. The necessary
aspect is to bring the user for free multiple times on the app. One can argue that
Zomato has a case to create something around it, given it has over 40mn MAUs, of
which only ~11mn are monthly transacting users. The balance users are searching
foraditi.sharaf@ambit.co
restaurants, reading reviews, providing ratings etc.

Zomato
However, the core element for a super app still remains chat and/or payments. Grab
is a perfect example of how to leverage large consumer data.
 Grab started ride hailing services in 2012, and continued to innovate and launch
new products around the same while engaged in a bitter fight with Uber.
 Despite this steep competition, it launched its payment services and acquired
companies during 2016/17 in the payments space, laying the foundation for a
super app.
 It continued its foray into newer consumer-centric verticals by launching food
delivery in 2018.
 It then finally entered the holy grail of financial services armed with massive first-
party data. This was in 2018. It further expanded its scope by obtaining a digital
banking license in 2020. The success of this financial undertaking unit itself was
so high that it raised US$300mn at the financial services entity itself.
Exhibit 29: Journey of Grab from GrabTaxi to a super app
Source: Company presentation
Whilst these are early days, we do not see Zomato being able to crack either
payments or chat. Various strong incumbents have already made their mark.
Key conclusion: Growth is assured but profitability isn’t

guaranteed
In summary, we note the following points for Zomato:
 We believe that present 11mn MTUs can increase to ~100mn over the next
decade (~200mn for the market). This implies a MUCH faster revenue growth
rate than Meituan/Doordash, which operate in more mature markets.
 Extrapolating the sharp improvement in economics as seen in 9MFY21 isn’t
prudent as Zomato would have to spend more money in marketing and user
acquisition.
 Given the large TAM, we believe Zomato’s business model will be continuously
challenged. But the company has adequate capital (US$1.7bn cash in bank, post-
IPO) and will be able to weather the storm as it has done so in prior occasions.

Zomato
Valuations – Premium valuations for scale

Zomato has turned a corner with its execution, starting from a restaurant
discovery platform to being a pivot for restaurant and customer interaction.
Whilst being massively successful in the domestic market, it has shrugged off
global competitors. It now is well-placed to find for itself a larger total
addressable market which would extend well beyond the food delivery
space. The organic market opportunity further supports its case as the
industry structure is a duopoly. It would rightfully trade at a premium to
global food delivery companies given the relative nascence of the industry.
We value the company at US$7.2bn, higher than our previous valuation of
US$4.5bn as massive capital raise and rationalizing industry behavior would
enable Zomato to monetize well. The company trades at 11.5x FY23E sales on
our estimates. There remains a known unknown option value for ancillary
platform-based opportunities.
Global valuations teardown
Zomato trades at massive premium to global valuations owing to the massive market
opportunity. The large difference is global players either have gargantuan scale like
Meituan (25x Zomato in terms of orders delivered) or operate in high GDP/capita
markets like DoorDash (average order value US$30 compared to US$5 in India).
Thus, the difference between Zomato and other players is Zomato would either have
to chase profitability or chase exponential growth. Breakneck pace of expansion
alone would not automatically imply profitability. In this context, we assume that
Zomato would chase growth with the new capital and hence our revenue estimates
are healthy at 30% CAGR over FY22-FY26E. There is an upside potential to our
revenue estimates, but that will likely mean lower contribution/order.
Exhibit 30: Comparable valuation of global food tech players
70 DeliveryHero
Revenue CAGR (2019-2022)
60
50
40
JustEat
30
Meituan
20 Zomato
DoorDash
10
0
0 2 4 6 8 10 12 14
P/S (2022E)
Source: Ambit Capital research, Company, Bloomberg, * - Bubble reflects the total number of orders
A concept stock that numerous asset managers would be interested in!

Whilst our optimistic fundamental valuation of US$7.2bn already factors in a
premium to global peers due to its higher growth, we note that there’s a distinct
possibility of its IPO being priced at higher valuations! The Indian internet space has
large promise due to multiple macro factors. The power of innovation and tech has
been well-documented in markets of China, where despite lower GDP/capita vis-à-vis
the developed markets, massive wealth creation was seen in the tech space. This is
natural to induce a FOMO factor amongst asset managers. Secondly, there are many
adjacent opportunities which can be chased by a handful of companies, and Zomato
is one of it. Thus, though not quantifiable (and NOT in our target valuations), such
opportunities tend to get an abstract valuation beforehand. This could lead to a
scenario of buy at any price! The emphasis on tech space has already re-rated
multiple Indian internet-based companies to sky high valuations that are difficult to
justify with rational assumptions. Indian asset managers have launched global funds
to invest in global tech leaders. Global investors too would look at Zomato as a large,
scalable tech play. Thus, we see massive demand for Zomato.

Zomato
Exhibit 31: The entire Indian internet space trades at rich valuations
MCap
P/S EV/EBITDA P/E RoE (%) FY20-FY23E CAGR (%)
Company (Rs bn)
FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E Sales EBITDA EPS
InfoEdge 625 52 42 36 206 137 119 696 239 141 4 11 16 10 11 NM
IndiaMart 236 29 24 20 59 51 39 72 64 53 37 32 35 21 18 16
Affle 140 27 20 17 108 82 65 135 108 85 34 30 29 17 35 36
Tanla
118 5 4 3 27 21 18 34 29 24 43 37 34 13 51 NM
Solutions
Route Mobile 91 6 5 4 54 42 34 70 55 42 27 23 25 14 39 55
Justdial 54 8 6 6 32 24 19 23 23 18 17 16 18 12 (0) 2
Matrimony 22 6 5 5 29 22 18 51 36 29 17 21 23 8 28 38
Source: Ambit Capital Research, Bloomberg, Note – Estimates are not available for RailTel and EaseMyTrip
Exhibit 32: Food delivery comparables

Country M-Cap P/S ROE (%) EV/EBITDA (x) 2019-22 CAGR (%)
Company
(US$ mn) 2022E 2020 2021E 2022E 2020 2021E 2022E Sales EBITDA EPS
Meituan China 228,259 5 5 (10) 5 (312) 92 41 42 55 74
Doordash USA 46,641 8 NA (4) 1 294 130 61 28 NM NM
Delivery Hero USA 39,614 3 (93) (45) (69) (68) (254) 81 60 NM NM
Dominos USA 16,399 3 NA (14) (1) 24 22 20 7 7 8
HelloFresh Netherlands 15,297 2 (3) (4) (0) (291) 63 23 44 104 NM
Grubhub USA 6,351 2 (14) 5 9 53 30 17 18 231 NM
Jubilant Foodworks USA 5,170 7 24 19 35 50 33 28 11 17 32
Source: Ambit Capital Research, Bloomberg
Summary of our assumptions

We put out some of our assumptions used to reach the value of Zomato as under:
 We build in a decline in GOV/order in FY22. As the pandemic recedes, we
believe GOV/order would first reduce from record highs of 9MFY21. Accordingly,
we build in 10% decline in GOV/order in FY22E.
 Our total order estimates are conservative for FY22E at 345mn. It must be noted
that 1HFY20 orders were only slightly lower than 2HFY20 orders, after adjusting
for the 7 days of lockdown.
 Our estimates basically incorporate that the industry will chase orders as
aggressively as before but also focus on unit economics. It is obvious that
focusing on contribution per order will lead to slowdown in order trajectory.
 Accordingly, our contribution estimates are Rs21/order for FY22E. This was
(31)/20 in FY20/FY21E. The risk to our estimates is should the company continue
to chase revenue growth north of 40%. In that scenario, profitability would be
elusive.
Exhibit 33: Our near-term estimates
Particulars (Rs mn) FY19 FY20 FY21E FY22E FY23E
Revenues 13,126 26,047 20,980 32,913 46,305
o/w: Food Delivery 9,728 20,964 16,118 24,177 33,001
o/w: HyperPure 149 1,076 1,368 1,956 2,699
o/w: Others 3,248 4,008 3,494 6,780 10,605
Total orders 191 403 230 345 448
GOV/order 282 278 390 351 368
Total GOV 53,870 112,209 89,543 120,883 165,005
Contribution/order - (31) 30 21 25
EBITDA (22,435) (23,047) (699) 1,979 6,091
EBITDA Margin -171% -88% -3% 6% 13%

Zomato
Exhibit 34: Our long-term estimates - We assume the industry will chase profitability
over growth
Particulars (Rs mn) FY22-FY26E FY26E-FY30E FY30E-FY40E
Revenue CAGR 30% 20% 17%
Total Orders CAGR 21% 13% 10%
Average AOV (Rs) 5% 5% 5%
% revenue from non-delivery (Average) 31% 35% 37%
Average EBITDA margin 16% 22% 39%
Average Contribution per order(Rs) 29 45 88
Exhibit 35: Our DCF-based valuation

Valuation Date Rs mn Comments
PV of CF 242,798 WACC of 16%
TV of CF 209,809 TG of 5% post FY40E
We reduce our WACC from 20%
FCFF 452,607 earlier to 16% now as capital raise
Net Debt(FY22E) (79,970)
Basis cash in bank at Dec'20 and US$450mn fund raise less cash would have eliminated any
needs for next year
probability of failure.
Net FCFE 532,577
Valuation in US$
7,246
mn
Do we build in optionality in our base case assumptions?

Whilst Zomato may not have the ability to become a super app, it may have the right
to win in businesses adjacent to the restaurant ecosystem like lending. Our channel
checks indicate that Zomato has already launched a business of lending to
restaurants. However, there has been no disclosure of the same other than its
mention in the objects of the company. Given the lack of disclosures on this front, we
are unable to incorporate this in our estimates. But our assumptions on Zomato’s
base businesses itself are highly optimistic, factoring in continuation of stellar
execution.
Exhibit 36: Zomato has already expanded into lending-related services


Zomato
Grab and Meituan’s success with multiple consumer businesses to which food delivery
is very integral, implies that Zomato could be an interesting acquisition candidate for
global giants or Jio Platforms, which are attempting to build apps with multiple user
cases. Notably, in 2020, Amazon acquired 16% stake in UK Food Delivery major,
Deliveroo (link).
Impact on InfoEdge
We had turned SELLers on InfoEdge in Dec’20. We had then valued Zomato’s stake in
InfoEdge at US$900mn. The shareholding of InfoEdge is currently 18.55% in Zomato
and the following transaction would happen in the IPO.
 InfoEdge would sell shares up to monetary value of US$100mn. Assuming the
IPO at our valuations, this implies reduction of stake to the tune of 1.4%.
 On this reduced base, i.e. 17.2%, there would be universal dilution due to fresh
issue of US$1bn. This would imply dilution of 13.8% of holdings. This would imply
shareholding of 15.0%.
Assuming these valuations and shareholding, InfoEdge stake in Zomato would be
valued at US$1.09bn. This is an increase of US$190mn, or Rs108/sh. We exclude
liquidity discount and taxes in this computation as our assumed valuation for Zomato
is anyways conservative. Our base case TP for InfoEdge then would be Rs4,462.
(Rs4,354 + Rs108).
We present a scenario analysis on incremental value creation for InfoEdge from our
earlier estimate of US$900mn at different valuations of Zomato IPO. We assume
secondary and primary fund-raise at similar valuation for this analysis.
Exhibit 37: Scenario analysis of FV of InfoEdge post Zomato IPO
Particulars Different Cases
Zomato IPO valuation (US$bn) 7 8 9 10 11 12
Resultant InfoEdge shareholding 15.0% 15.4% 15.7% 16.0% 16.2% 16.4%
Value of InfoEdge stake(US$bn) 1.05 1.23 1.41 1.60 1.78 1.96
Current value assumed 0.9 0.9 0.9 0.9 0.9 0.9
Incremental Value(US$bn) 0.15 0.33 0.51 0.70 0.88 1.06
Incremental Value/sh (Rs) 84 187 290 394 497 601
Resultant TP for InfoEdge (Rs) 4,438 4,541 4,644 4,748 4,851 4,955
Source: Ambit Capital research, Company, Note – we have not considered liquidity discount and taxes here.

Zomato
Questions for management

We herein note certain aspects of the company which we would like to get further
clarity:
1. Cohort behaviour and divergence versus global markets:
 What is the split of GOV across top-15 markets, the next 100 markets and the
balance 400 cities? How are the trends different in terms of AOV? Are these
sustainable?
 What is the split of orders on similar lines as earlier market segmentation?
Amount of delivery fee and delivery costs incurred in each of these segments
would aid in estimating whether rapid order growth can continue from smaller
cities even if delivery charges continue post the pandemic. What is the split of
contribution from such different market segments?
 Discussion on Super Users? What percentage of users use the delivery service for
say 10 orders a month and more against the average of ~3 orders/mo/user.
What are their average GOV trends? Is there any such comparison available
across competition or global markets?
2. New user acquisition: There has been a rather optimistic view of customer
acquisition with the funnel. Comparisons with China need to be undertaken with
a pinch of salt. China GDP/capita 10 years ago was over US$4,500; India’s
GDP/capita today is US$2,100.
Exhibit 38: The macro opportunity seems very compelling for Zomato…
Source: Ambit Capital research, Company, size of bubble represents promoter remuneration
The key question arises on two fronts:

 What is the thought process on acquiring new users to continue exponential
growth? The monthly active users are tepid even compared to relatively
advanced digital use cases like online shopping. What is management’s
assessment of the same?
 The ratio of active users to transacting users remains low. Is it practical to believe
there is massive room for this to improve? How monetisable are non-transacting
users via restaurant advertisings? Also, is this a function of ~2.87 difference in
active restaurant listings and delivery restaurants? What is the cause for such
wide disparity?

Zomato
Exhibit 39: …but active and transacting users are still low
Monthly transacting users Monthly active users

50
mn
40
30
20
10
-
FY18 FY19 FY20 9MFY21
3. What are the apt commission rates: There is general agreement in most of
our channel checks with restaurants. Food delivery apps have become very
important but the commissions are too high. What is the management’s
assessment of apt level of commissions? Is it true that you have peaked out?
What steps are being undertaken to guard against the next potential disruptors
like DotPe, which will thrive only if your margins are exorbitant from restaurants’
perspective?
4. Delivery partners classification: The U.K. court ruling in March’21 forced Uber
to classify their drivers as ‘workers’ entitled to certain benefits but still being short
of ‘employee’ classification. In India, these are merely considered as freelance
commission-based workers. With the new labour code, should such regulations
be also implemented in India? Would there be a material impact on unit
economics? Is such an event, however unlikely, a potential catastrophe?
5. Specific areas of M&A: What is the approach towards M&A being undertaken?
Does the company wish to enter multiple newer business models or massively re-
invest in further deepening the market? The past track record of acquisitions has
been patchy. What incremental checks have been put in place now? Rs56bn of
the Rs75bn of fresh raise is planned to be kept aside to fund organic and
inorganic growth initiatives.
6. Challenges from well-funded full-stack players in groceries/fresh supply
to restaurants: The HyperPure business model rests on creating an entire supply
ecosystem to restaurants. There are several large, well-funded startups trying to
create the last mile supply ecosystem like Udaan, Instamart etc. How is the
competitive intensity in this space? Is HyperPure seen as a separate cash
generating unit or another tool to ensure restaurants remain within the Zomato
ecosystem?

Zomato
Management details: Solid team

We enlist the key management team details of Zomato. This is not an exclusive list.
Notably, we find a lot of entrepreneurial characteristics in the key team members.
Further, employee ownership of Zomato cumulatively exceeds that of the founder,
implying strong alignment of interest. That said, we note that there have been several
sale transactions by employees and the founder, presumably for liquidity reasons.
Exhibit 40: Key employees at Zomato
Years in Total work Experience outside Educational
Name Roles in Zomato Comments
Zomato experience Zomato background
Deepinder
13 16 Founder & CEO Bain & Company IIT (D)
Goyal
Gunjan Patidar 12 13 CTO Cvent IIT (D)
CFO, VP-Finance &
Akriti Chopra 10 10 NIL CA
Operations
Damini HR Executive - M.Sc. (LSE), BBA
10 14 VP, HR and Operations
Sawhney Radisson (Amity)
Surobhi Das 8 11 COO, Chief of Staff Bain & Company IIM (A), B.Arch.
VP - Product & Payments,
Pradyot Ghate 8 15 CEB IIT (D)
AVP - Product & Grwoth
Global Business Head -
Dining out, Product Lead
Riddhi Jain 7 10 Castrol, BP MBA, B.Com (DU)
- New Initiatives, Country
Head - Zomato Gold
Advisory Member - EAT, Advisor -
Founder - Zomato
Ankit Kawatra 7 10 GT, CEB BBS(Fin.), Cambridge Queens Commonwealth Trust,
Feeding India
Forbes 30 u 30
Founder, COO, Global
Took a 2 year sabbatical in 2018
Gaurav Gupta 6 16 Ad sales head, Head - A.T. Kearney IIM (C , IIT (D)
and returned to Zomato.
Table reservations
Tata Motors,
Ashish Kumar 6 13 Head of Recruitment MBA(Symbiosis), LLB
FutureStep, Deloitte
Global Head of Content, Left Zomato in 2015 to cofound
WRU, Time Out,
Karl Baz 5 20 Launch & Country B.Sc (ALU) startup called codeank.in and then
Springer Nature
Manager returned to Zomato
CFO, Head - Corporate Global Logic, Kotak Co-Founder of Fintech startup -
Akshant Goyal 4 14 IIM (A) , B.E. (DU)
Development Investment Banking PinCap ; 3rd CFO in 3 years
CEO - Food delivery, Snapdeal, Twitter, Mentor of change - Atal Innovation
Rahul Ganjoo 4 21 MS (BITS Pilani)
VP(Product Mgmt.) Symantec, Wipro Mission, Advisor - Observe.ai
Sukriti Global Head - Zomato Bain & Company,
4 8 MBA (ISB), B.Com (DU)
Sachdeva Pro Google
Mohit Gupta 3 23 Co-Founder MMT, Zovi, Pepsico IIM (C , B.E.(Mech.)
COO - Food Delivery,
GoFro.com, MMT, IIM (A), B.E.(Jamia
Mohit Sardana 3 18 Business Head - Food @
Accenture, Pepsico Millia)
Work
Global Sales Head -
Chandan GoFro.com, Futures
3 17 Dining, Head - EM for MBA (ISB), IIT (D)
Mendiratta first, Deloitte
Online Ordering
Head of Growth, Matrix Partners India,
Shalin Bhatt 3 8 AVP(User growth & MediaCom IIM (A), IIT (K)
marketing) Singapore
Bohka, Banging
Chaitanya
3 13 Global Head - Events Beats, Weirdass B.Sc(Warwick), LSE Founder of EME and GrubFest
Mathur
Comedy
Lead - Zomato Design,
Vijay Verma 3 8 Principal Product UiGate, Designletter NA Freelancer for 5 years
Designer
Tradus, KlickPay, Was CTO of Zomato in 2013 when
Ram Singla 2 16 VP - Tech IIT (D)
Ixigo, Algorythma left. Founded PayMango in 2014
Hemal Jain 2 15 Global Head of Finance HUL CA , IIM B Co-Founder of Distribution House
Head - Growth (Zomato
Ankur Jain 2 11 Gold), Head - Digital Sony, Star , EY IIT (B), PDDBM IIM (C)
Marketing
Hero, Cairn, A.T.
Rohan Rijhwani 2 18 Head - HyperPure IIT (B)
Kearney
Source: Ambit Capital Research, Company

Zomato
Snapshot of Company Financials

Balance Sheet
Particulars (Rs mn) FY18 FY19 FY20 9MFY21
Equity & Reserves 12,189 25,679 7,033 63,262
Non-Current Liabilities 190 1,388 14,763 803
Total Equity & Liabilities 12,379 27,068 21,795 64,066
Fixed Assets 1,911 3,898 15,915 14,795
Other Non Current Assets 735 512 455 1,037
Current Assets 11,099 29,718 12,634 54,051
Current Liabilities 1,366 7,061 7,208 5,818
Net Current Assets 9,734 22,657 5,425 48,234
Total Assets 12,379 27,068 21,795 64,066
Source: Company, Ambit Capital research
Profit and Loss

Revenues 4,660 13,126 26,047 13,013
Expenses 5,585 35,561 49,094 16,151
EBITDA (924) (22,435) (23,047) (3,137)
Depreciation 291 431 842 1,032
EBIT (1,216) (22,866) (23,889) (4,169)
Net Interest Costs 63 87 126 55
Other Income 210 851 1,380 663
Exceptional Items - 11,999 (1,220) (3,248)
PBT (1,069) (10,102) (23,856) (6,809)
Tax & Others - - - 13
PAT (1,069) (10,102) (23,856) (6,796)
Cash flow statement

PBT (1,069) (10,102) (23,856) (6,809)
WC Changes & Others 421 (7,047) 2,740 3,854
Taxes Paid (46) (277) (321) 261
CFO (693) (17,427) (21,436) (2,694)
Purchase of PPE (53) (451) (213) (26)
Others (8,153) (12,283) 17,566 (42,196)
CFI (8,206) (12,735) 17,352 (42,222)
Cash raise 9,700 22,645 3,916 47,650
Others 286 (8,650) 327 1,908
CFF 9,413 31,295 3,589 45,743

Zomato
Institutional Equities Team

Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research Strategy / Accounting / Home Building / Consumer Durables (022) 66233241 nitin.bhasin@ambit.co
Ajit Kumar, CFA, FRM Banking / Financial Services (022) 66233252 ajit.kumar@ambit.co
Alok Shah, CFA Consumer Staples (022) 66233259 alok.shah@ambit.co
Amandeep Singh Grover Mid-Caps / Hotels / Real Estate (022) 66233082 amandeep.grover@ambit.co
Ashish Kanodia, CFA Consumer Discretionary (022) 66233264 ashish.kanodia@ambit.co
Ashwin Mehta, CFA Technology (022) 6623 3295 ashwin.mehta@ambit.co
Basudeb Banerjee Automobiles / Auto Ancillaries (022) 66233141 basudeb.banerjee@ambit.co
Deep Shah, CFA Media / Telecom / Oil & Gas (022) 66233064 deep.shah@ambit.co
Dhruv Jain Mid-Caps / Home Building / Consumer Durables (022) 66233177 dhruv.jain@ambit.co
Jashandeep Chadha, CFA Metals & Mining / Cement (022) 66233246 jashandeep.chadha@ambit.co
Karan Khanna, CFA Mid-Caps / Hotels / Real Estate (022) 66233251 karan.khanna@ambit.co
Karan Kokane, CFA Automobiles / Auto Ancillaries (022) 66233028 karan.kokane@ambit.co
Mitesh Gohil Banking / Financial Services (022) 66233197 mitesh.gohil@ambit.co
Nancy Gahlot Strategy / Forensic Accounting (022) 66233149 nancy.gahlot@ambit.co
Nikhil Mathur, CFA Healthcare (022) 66233220 nikhil.mathur@ambit.co
Pankaj Agarwal, CFA Banking / Financial Services (022) 66233206 pankaj.agarwal@ambit.co
Prasenjit Bhuiya Agri & Chemicals (022) 66233132 prasenjit.bhuiya@ambit.co
Ritesh Gupta, CFA Consumer Discretionary / Agri & Chemicals (022) 66233242 ritesh.gupta@ambit.co
Satyadeep Jain, CFA Metals & Mining / Cement (022) 66233246 satyadeep.jain@ambit.co
Sumit Shekhar Economy / Strategy (022) 66233229 sumit.shekhar@ambit.co
Udit Kariwala, CFA Banking / Financial Services (022) 66233197 udit.kariwala@ambit.co
Vamshi Krishna Utterker Technology (022) 66233047 vamshikrishna.utterker@ambit.co
Varun Ginodia, CFA E&C / Infrastructure / Aviation (022) 66233174 varun.ginodia@ambit.co
Vinit Powle Strategy / Forensic Accounting (022) 66233149 vinit.powle@ambit.co
Vivekanand Subbaraman, CFA Media / Telecom / Oil & Gas (022) 66233261 vivekanand.s@ambit.co
Sales
Name Regions Desk-Phone E-mail
Dhiraj Agarwal - MD & Head of Sales India (022) 66233253 dhiraj.agarwal@ambit.co
Bhavin Shah India (022) 66233186 bhavin.shah@ambit.co
Dharmen Shah India / Asia (022) 66233289 dharmen.shah@ambit.co
Abhishek Raichura UK & Europe (022) 66233287 abhishek.raichura@ambit.co
Pranav Verma Asia (022) 66233214 pranav.verma@ambit.co
Shiva Kartik India (022) 66233299 shiva.kartik@ambit.co
USA / Canada
Hitakshi Mehra Americas +1(646) 793 6751 hitakshi.mehra@ambitamerica.co
Achint Bhagat, CFA Americas +1(646) 793 6752 achint.bhagat@ambitamerica.co
Singapore
Srinivas Radhakrishnan Singapore +65 6536 0481 srinivas.radhakrishnan@ambit.co
Sundeep Parate Singapore +65 6536 1918 sundeep.parate@ambit.co
Production
Sajid Merchant Production (022) 66233247 sajid.merchant@ambit.co
Sharoz G Hussain Production (022) 66233183 sharoz.hussain@ambit.co
Jestin George Editor (022) 66233272 jestin.george@ambit.co
Richard Mugutmal Editor (022) 66233273 richard.mugutmal@ambit.co
Nikhil Pillai Database (022) 66233265 nikhil.pillai@ambit.co

Zomato
Explanation of Investment Rating - Our target prices are with a 12-month perspective. Returns stated are our internal benchmark
Investment Rating Expected return (over 12-month)
BUY We expect this stock to deliver more than 10% returns over the next12 month
SELL We expect this stock to deliver less than or equal to 10 % returns over the next 12 months
UNDER REVIEW We have coverage on the stock but we have suspended our estimates, TP and recommendation for the time being NOT
NOT RATED We do not have any forward-looking estimates, valuation, or recommendation for the stock.
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
Note: At certain times the Rating may not be in sync with the description above as the stock prices can be volatile and analysts can take time to react to development.
Disclaimer
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Report and inform either Ambit Capital or Ambit Singapore Pte. Limited.

Zomato
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Ambit - Zomato - PRE-IPO Note - Sky Is The Limit - 05may2021

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Zomato

Sky is the limit? Internet Classifieds

The Narrative in charts

Source: Ambit Capital research, Company

May 05, 2021 Ambit Capital Pvt. Ltd. Page 2

Exhibit 4: Indicative business model of disruptors like Dotpe in India

Source: Ambit Capital research

Exhibit 5: Comparable valuations of global food tech players

May 05, 2021 Ambit Capital Pvt. Ltd. Page 3

Affordability mars rosy top-down narrative

Understanding the market

Source: Ambit Capital research

May 05, 2021 Ambit Capital Pvt. Ltd. Page 4

Does this imply increase in repeat order is the holy grail?

There are multiple considerations to be noted on the above table:

The known unknown market opportunities

May 05, 2021 Ambit Capital Pvt. Ltd. Page 5

Zomato focused on restaurants; Swiggy on urban convenience

Source: Ambit Capital research, Company

May 05, 2021 Ambit Capital Pvt. Ltd. Page 6

Swiggy on the other hand has expanded to provide an all-encompassing delivery

May 05, 2021 Ambit Capital Pvt. Ltd. Page 7

Zomato: A blitzscaling success story!

― Reid Hoffman, Blitzscaling: The Lightning-Fast Path to Building Massively

Exhibit 9: Key events in the history of Zomato

Key terminologies essential to understanding Zomato

May 05, 2021 Ambit Capital Pvt. Ltd. Page 8

But what exactly in Gross Order Value?

May 05, 2021 Ambit Capital Pvt. Ltd. Page 9

How does Zomato’s accounting work?

May 05, 2021 Ambit Capital Pvt. Ltd. Page 10

Exhibit 15: Break-up of advertising and sales promotion costs

What does this imply?

May 05, 2021 Ambit Capital Pvt. Ltd. Page 11

MTU and MAU are important KPIs

Source: Ambit Capital research, Company

Cohort analysis – India is different from the world

Source: Ambit Capital research, Company(S-1)

May 05, 2021 Ambit Capital Pvt. Ltd. Page 12

Source: Ambit Capital research, Company

Zomato has struggled with its acquisitions

May 05, 2021 Ambit Capital Pvt. Ltd. Page 13

Multiple acquisitions along the journey

Conclusion: Zomato emerged as a capital-efficient market leader in Indian

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Large TAM would attract competition

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Source: Ambit Capital research

A peek into global players

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Some other prominent risks for Zomato related to high TAM

2. The competitive intensity in the industry

Can Zomato be a super app?

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Source: Company presentation

Key conclusion: Growth is assured but profitability isn’t

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Valuations – Premium valuations for scale

A concept stock that numerous asset managers would be interested in!