Technology

Zomato IPO: Analysing the future of the Indian Foodtech giant

by Sandeep Kumar

The future of Indian Foodtech is here

The food delivery and restaurant service tech giant, Zomato plans to go for an IPO this June or July. The IPO catches headlines, not just because of the amount being raised or the time when the IPO comes (both of which we discuss later), but also because Zomato could as well be the very first Indian Unicorn to go public. This shall be a momentous moment for not just the tech startup, but also for the entire startup community in India. The IPO could open doors to a new form of exit for the Indian founders and VC firms and cement India’s position as a startup friendly nation.

Zomato plans to raise over a billion dollars(!). This will be the biggest IPO since March 2020 after SBI Cards IPO at close to $1.3 Bn.

Business Model

Zomato was founded in 2008 as a simple restaurant reviews website. In 2015, Zomato entered a very crowded Indian food delivery space. Since then the landscape has changed completely. Out of the numerous startups (FoodPanda, TinyOwl, Scootsy, OlaCafe, UberEats) that were offering to deliver your food, chances are today you order food from one of these three: Zomato, Swiggy or Amazon (Amazon currently offers food delivery services in and around Bangalore). What happened to the rest? Well, most shut down, while the rest were acquired and then shut down. Barely a handful which were acquired by Zomato or Swiggy operate within, not independently.

Zomato acts as a restaurant discovery platform aggregating menus, dishes, user reviews and more. Zomato has nearly 3.5 lakh restaurants listings on its platform with more restaurants expected to join in as the pandemic and the induced lockdowns play a havoc on their dine in revenue streams. These restaurants pay Zomato a fee for greater exposure on the platform. The hope is, once a customer tried the food, chances are they will pay a visit to the restaurant. Now the pains and the faults in this premise make for a story for some other day. 

Zomato’s next line of revenue is the exclusive paid membership program very creatively titled “Zomato Pro”(earlier known as Zomato Gold), offering special discounts and/or free deliveries to is subscribed members. This membership model works how a gym does, take the membership fee and then hope the service is not utilised. Zomato has one advantage though, it can decide what discount to offer and/or what price to charge (dynamic pricing), based on traffic conditions, meal hours, order quantity etc. Zomato currently has 1.4 Million pro members and over 25k restaurants listed on Zomato Pro program.

Not all restaurants choose to be a part of the Zomato Pro program as these restaurants are also expected to offer discounts and offers on dine in options as well and maybe not all restaurants find themselves in such a position (again a story for some other day).

Zomato’s next stream of revenue comes from Hyperpure which supplies raw material to restaurants. This is a genius move in my opinion, at least theoretically. Zomato’s food delivery business allows it to forecast the raw material demands of a restaurant. Efficient buying practices and careful hedging (Zomato is in no position to carry out hedges against sharp commodity price movements, simply because it does not do enough volumes to justify this sort of a thing) can allow Zomato to up sell these raw materials, earning a constant cut.

If the hedging works, the restaurants are also set to benefit as they will receive a fixed price for their raw materials, allowing prior ordering. Zomato currently has 6000 restaurants on its Hyperpure platform in just two years.

And finally comes the last source of revenue (no need to be amazed, all this revenue does not trickle down to the bottom line), the delivery partners delivering your food. Here Zomato earns commission from the restaurants as well as the delivery charges from the customer (yes, all those extra delivery charges you paid and still these guys aren’t profitable…).

  Source: Zomato’s DRHP

Now Zomato does not give a breakup of how much revenue it makes from each segment, but nevertheless, most of the revenue comes from food delivery business, the ones you are the most aware of.

The not so straightforward Market Landscape

Food and restaurant Services is a competitive market in India comprising food delivery players like Zomato and Swiggy, cloud kitchens like Rebel Foods and branded Food Services players such as Dominos, McDonalds and Pizza Hut which. Food delivery players also compete with multiple other participants in the Food Services industry including restaurants which own and operate their own delivery fleets and both online and offline modes where restaurants place their advertisements to attract customers.

The food and restaurant industry in India is composed of three segments: delivery, take-away and dine in. Out of the three, the food delivery business is expected to grow most rapidly. While this was true even before the pandemic, the post pandemic has further cemented this.

 

Source: Zomato’s DRHP

During first half of 2020, the food delivery business contracted as India braced itself for the COVID lockdowns. However, once the lockdowns and the initial hysteria was over, a boost of business came to the food delivery business, not to the dine in or the drive way streams. This clearly is good for Zomato.

But things are not as straightforward for Zomato. This is because of how the food delivery business inherently is structured. Food delivery is more of ‘now pamper me’ kind of business and not ‘I don’t care what it is as long as it gets my thing done’ kind of business. Services such as Netflix or Zomato come in the former while services like Uber or Paytm which offer more of a commodity sort of service, come in the later.

One doesn’t really care who gets you from one place to the other or what app you used to pay someone, but one strongly cares what shows or movies a certain platform offers or which restaurant offers its dishes on which platform.

Source: Zomato’s DRHP

Zomato’s Financials

Let’s pore over the unit economics first. The number of orders placed on Zomato is largely driven by its customer base, restaurant partners and delivery partners. The number of orders is also subject to seasonal fluctuations and tend to be generally higher when customers may be less likely to dine-out as a result of unfavourable weather or during certain festival seasons and holidays when customers are more likely to order food for delivery.

Source: Zomato’s DRHP

The Average Order Value for Zomato has gone up over the last 7 quarters and stands at INR 407. The AOVs are higher for orders from premium restaurants. The orders have grown from 30.6 Million for 2018 to 403.1 Million for 2020. That’s a colossal 1200% jump in merely 2 years of time.

Source: Zomato’s DRHP

The change of heart and mind with increasing Unit Economics

Moving on to the unit economics of Zomato and we are welcomed by greener pastures: while last year Zomato lost INR 30.5 on every order made, this year Zomato managed to make a profit of INR 22.9 on each order. This has been achieved mostly on the back of.

  • increasing restaurant commission charges (remember the story for some other time 😉)
  • increasing delivery charges from the customer (sadly)
  • and cutting costs on deliveries and discounts (I swear I felt the last one pinch).

All this tight cost cutting and pressurising the restaurants for more commissions has led to this rather phenomenal turnaround.

And like most things in life, if it looks too good to be true, it probably is; many think such commission structure is rather unsustainable and Zomato won’t be able to sustain this for long. Whether or not Zomato manages to sustain this or not, the IPO, pre-IPO funding and special stake sale from Naukri.com is bound to flush Zomato with tons and tons and tons of sweet cash.

Source: Zomato’s DRHP

All this positive unit economics (whether or not sustainable) is yet to impact its bottom line (which continues to dive deep in red), Zomato seems to be right at the verge of hitting profitability. While the market is in no way saturated, as more and more people start making digital payments, internet becomes cheaper and smart phones penetrate the society even more, online food ordering is bound to keep increasing.

The increasing Turnaround of Customer Cohort

As the number of customers to acquire rises, it would prove to be a challenge to monetise each customer so well that each order’s unit economics turns in the green. Acquiring customers takes cash, and that too loads of it. What matters is whether or not Zomato manages to make money from its customers, which gets us to our next metric: Customer Cohorts.

Source: Zomato’s DRHP

Acquiring customers comes with a cost and that cost needs to be redeemed from each customer. This directly implies that the customer must spend on the platform, more than what the platform spent on acquiring him. The above chart shows that once the customer is acquired, he continues to stick to the platform. The bunch (cohort) of customers acquired in 2017 now spend 3X of what they did in 2017. This is pretty impressive given a lot of customers must also have churned.

So, with the unit economics turning positive, the question that still lingers is, why does Zomato still operate in loss?

For that we switch over to the financial statements.

Source: Zomato’s DRHP

Well, there are two ways to explain the huge losses. Firstly, the huge amounts of cash spent to acquire customers and the time lag between CAC and LTV of each customer. Customers take some time to monetise once acquired. The costs have already been paid, even before the customer start generating any revenue. All those acquisition costs get added up as we see in Other Expenses line item.

 

These Other Expenses are not really “Other”, they are the marketing spends and all the discounts that Zomato offers on its platform. This line item accounts for most of the customer acquisition spends.

The other major source of expense is the Employee Expenses. Well, maybe because Zomato pays its peeps well, who knows…

All of this requires cash, which Zomato happens to have truckloads of. The latest pre-IPO round got Zomato over $680 Mn. If the IPO goes as planned, Zomato may end up with $1.00 – 1.14 Bn more. A war chest of $1.7 Bn!

The shares of the company are going to be listed on National Stock Exchange of India. We expect that the shares will be listed at prices upwards of INR 60 per share. Previously the shares of the company were converted at a price of INR 58 per share.

Zomato plans to use most of its IPO crop in organic as well as inorganic expansion, offering discounts (yayy!), sales promotions, cementing its delivery network and thus acquiring more and more of both customer and restaurants.

That’s what $2 Bn is capable of. I would not want my competitors to have a $2 Bn advantage over me.

Which gets me to Zomato’s rivals…

Peer Group Analysis

The pre-IPO funding round in February 2021 valued the company at $5.40 Bn. Within the expected price range the IPO would value the company at $6.50 – $7.00 Bn. Taking EV/Revenue multiple into account and weighted average calculation of the comparable companies, we arrive at an NTM multiple of 8.76x which gives us an intrinsic valuation of 2.07Bn.

The Indian Food Delivery space is Duopoly: Zomato and Swiggy. Under the shiny apps, things twist and turn very differently.

For starters, the business approach of Swiggy is vastly different from Zomato. While Zomato wishes to service the entire restaurant supply chain, right from raw materials, to getting it delivered to your home, Swiggy assumes a different role.

Swiggy sees itself purely as a delivery aggregator. A delivery aggregator, that will deliver groceries, books, meat, alcohol, medicine, pretty much anything that fits into that Swiggy rider’s bag. Food fits, so it delivers.

This is important. Viewing from this angle, Swiggy becomes a delivery player, mimicking Delhivery in its business approach than Zomato! 

Food just happens to be what shot Swiggy to fame. Swiggy runs not a restaurant service business, but “I’ll find someone to deliver your stuff” business – a low cost, low capex, low overhead last mile delivery business, something which most players struggle to deal with.

Be reminded though, most of Swiggy’s revenue still stems from food. The IPO for Zomato is a big deal for Zomato, but an even bigger deal for Swiggy, which will force it to act. Acted Swiggy already has, raising a new funding round, but that’s no match for the $1 billion Zomato IPO. The IPO sets the scene for not just Zomato but Swiggy as well. A bombed IPO may as well hurt Swiggy’s IPO prospects.

There’s also a new kid in town, Amazon Food. Amazon Food, is like that rich kid whose mere presence threatens Swiggy and Zomato’s dominance. Things seem quite for now. Amazon only operates in Bengaluru, offers very low delivery fees and no packaging fees; and if you happen to be a prime member, you don’t pay that even.

And I get it. Maybe Amazon is not so much of a threat that I call it to be, but my fears are based on two reasons: firstly, Amazon. Yes. That’s it. Second, just as the dust from the numerous players undercutting each other settled, a new player enters the scene. Now it isn’t as if Indian market can’t accommodate these new entrants. The market’s expanding. But what all previous tech businesses have taught is, whoever lands first gets the bucks. Amazon with its existing, robust delivery network can very easily undercut its peers offering cheaper delivery and deeper discounts, as it seemingly has already started.

Will the IPO deliver in the same way Zomato does?

Zomato’s IPO is one the most awaited IPOs. The listing has come at a time when the Indian economy is going through crisis. However, being true to its foodtech giant status, the company has used tech extensively in operations, sales, marketing and automation, which has excellent operational leverage in the longer term, and tech company values tend to get a fillip.

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This article has been co-authored by Khubaib Abdullah and Ayush Dugar, who are in the Research and Insights team of Torre Capital.

 

The Fault in our Doge

by Sandeep Kumar

– And why it won’t go to the stars; or the moon; or practically anywhere for its sake

Among the deluge of cryptocurrencies popping up every day, Dogecoin has had the most gala ride in the past few months. The cryptocurrency, which features the ‘Shiba Inus’ dog as its mascot, gained its market cap from $1 Bn in early January to $80 Bn in May. January and May, of the same year! That is insane!

So a basic primer first for all those who don’t know what Dogecoin is.

Dogecoin: Something that started as just a meme.

Dogecoin is basically like Bitcoin (it actually is a fork of Litecoin, which is heavily adopted from Bitcoin) and like most cryptocurrencies, it enables peer-to-peer transactions on a decentralized network. The difference between the two? Bitcoin was a revolutionary technology, the original proof of work concept, based on a blockchain. Many called it the ‘disruptor of the internet’, some considered it a challenge to the global financial system, yet others considered it to be a shift of power from evil global forces to the next-door Joe and6 Jane. Bitcoin was the money of the future.

Dogecoin is just dogecoin, a digital coin, with the picture of a dog on it!

The Dogecoin has been around for much much longer than most think. It was started in 2013 by two engineers, Billy Markus from IBM and Jackson Palmer from Adobe. In their meeting they decided to combine the two phenomena that had taken the world by storm: Bitcoin and Doge, and out came the Dogecoin. Because this is what the guys do when they meet, they build random, open-source, meme-based, cryptocurrency.

The Initial Claim to Fame

The idea was to make an alternative to Bitcoin due to the massive profiteers that had gotten into mining it. Bitcoin, launched in 2008, had failed to achieve what it set out to venture. Dogecoin was expected to change that.

How?

Well, Bitcoin was limited in number, only around 21 million of those can be mined ever. Dogecoin, on the other hand, 10,000 of them can be mined every minute.

The Dogecoin was a hit amongst the crypto geeks. It was mostly used to tip online content creators due to the high speed of transactions, nominal denominations, and low cost of transaction compared to other cryptos like Bitcoin. It was dubbed as a ‘tipcoin’. It is claimed that the trading volume even surpassed the heavyweight Bitcoin for a brief period. In 2017, it crossed the $2 Bn market cap figure, after raising 50,000, USD for a Jamaican bobsled team, raising 30,000, USD for clean water in Kenya, and sponsoring a Nascar. All of this before crashing.

The Dogecoin went unnoticed for years, the original subreddit that had catapulted it to fame silenced, the founders of the coin left, and the code wasn’t even updated.

It was in March 2020 when the Doge had its moment. Serial entrepreneur and influencer Elon Musk threw his support behind Dogecoin and the community, claiming it was ‘inevitable’ and could be ‘the currency at Mars’. He was joined by several others such as Carole Baskin, a big cat rights activist, singer Gene Simmons, bodybuilder Kai Greene, former adult star Mia Khalifa, American rap star Snoop Dogg, etc.

Even with all the love and support that Dogecoin has been getting, let us walk you through the potential faults that hinder its acceptance as a currency of any form.

Founder’s Exit

The Dogecoin is a meme coin, not meant to be taken seriously. Even its founders didn’t. So much so that they abandoned the project long ago. Today merely three part-time developers manage the codebase. This has led to absolutely no tech development taking place in the Dogecoin code base since 2015.

While some view this in the ‘do not take it seriously’ vein, a poorly maintained codebase makes the Dogecoin susceptible to be dislodged by more up-to-date and modern coins. The Dogecoin may be left behind and simply replaced by some other memecoin that catches people’s fancy.

Cyber Attacks, Security Breaches, and Frauds

Due to very little codebase maintenance, Dogecoin has been hacked previously. The Doge Vault was infiltrated and close to 280 million Dogecoin, worth $55k then ($196 Mn today) were stolen along with the credit card information of hundreds of users. While the community almost immediately pooled resources to recover the stolen Doge under the banner, the official statement read this:

“It is believed the attacker gained access to the node on which Doge Vault’s virtual machines were stored, providing them with full access to our systems. It is likely our database was also exposed containing user account information; passwords were stored using a strong one-way hashing algorithm. All private keys for addresses are presumed compromised; please do not transfer any funds to Doge Vault addresses.

If you like to use Dogecoin, you should change your online account passwords and make sure to check your credit card statements frequently for fraudulent or unauthorized purchases. But let’s be serious here; we kind of hope you aren’t investing serious capital into this pseudo-currency. (emphasis added)

That is the official statement.

In 2014 a crypto exchange called Moolah was set up in the UK to handle Dogecoin by Alex Green. Many new doge holders jumped the wagon, while Green continued using the ‘tipcoin’ to make hefty tips. He even sold shares of the exchange as Dogecoins. It wasn’t long before Moolah was shut down, and Green disappeared with the money, who was later found to be Ryan Kennedy, a serial scammer, and rapist.

And not just dogecoin, but even with other cryptocurrencies, several unregulated exchanges spring up one day and take off the next, leaving investors high and dry.

Pump and Dump

Cryptocurrencies aren’t really of any use except mindless trading. The volumes are meager and regulators are absent. This makes them a ripe target for pump and dumps by pumping rings which have existed since the very inception of cryptos.

When the Reddit user /r/wallstreetbets successfully managed to pump the Gamestop stock, the crypto pump rings saw this as the moment that they had been waiting for for years. They saw a gullible audience, that didn’t really know what it was doing, to follow them thinking that they would make a blow against the big guys and have fun doing so.

Needless to say, most stories ended on a bitter note, with several of these gullible traders buying at the peaks when the pump rings sold.

This is what took place on January 28, when a Reddit user decided Dogecoin be the next asset to pump. He was joined by Elon Musk, an obsessive Twitter user. The price of the Dogecoin rocketed up and crashed the next day.

Not just the Dogecoin, but several other cryptocurrencies, all are susceptible to such hostile market manipulation.

Too Volatile to be a global currency

All cryptocurrencies have seen massive volatility. In the image below, bitcoin and ETH are found to be more volatile than the S&P 500 itself. Even as the S&P volatility dies down, the crypto volatility keeps rising.

These are not the characteristics of a stable, fiat currency. What is expected of the currency is to hold its purchasing power stable even over long periods of time, not jump up or down 10% by the time one goes from home to the grocery store.

Poor Hedge Against Inflation

As 0% interest rates or even negative interest rates seem a possibility, bitcoin, among others, is touted as a hedge against inflation. Limited supply cryptos like Bitcoin are positioned as a hedge against this inflationary scenario. Why? Because of its 21 million limits, Bitcoin’s demand vs supply is expected to cause an increase in price as supply decreases.

Even the short history of Bitcoin is not enough to cement its position as a hedge against inflation. Gold on the other hand has had millennia of history of tracking inflation and yet it was susceptible to shocks, manias, and crashes over the shorter term. Bitcoin is no different.

Even in the recent weeks as concerns of inflation pushed the 10 year US treasury yield from 1.34% to 1.62%, bitcoin suffered its worst drop in months. Unlike other inflation hedges, cryptocurrencies’ value is based entirely on other people’s willingness to hold on to it, not on some underlying asset like oil or real estate.

It is fully possible that increasing inflation may lead to an overall recession. The real test of cryptocurrencies will be when investors pull their money from riskier assets like bitcoin or pour more into it.

The infinite supply of Dogecoins

While a few cryptocurrencies do have at least the “limited number” argument in their favor, Dogecoin does not even have that. 10,000 dogecoins can be printed every minute. This rather infinite supply of the dogecoin makes it very hard for it to gain in value.

However, in spite of this structural anomaly in Dogecoin, the prices have soared considerably over the past months.

 

So much for being Decentralised

According to a Wall Street Journal report, the largest holder of Dogecoin owns 28% of the currency! The position is worth at least $2.5 Bn today! The top 10 largest addresses combined hold 43% of the total Dogecoin supply. The idea behind Dogecoin being decentralized simply bites the dust when just 10 wallet holders own 43% of the currency. One major sell-off and the prices crash.

Will the party continue for Dogecoin?

Bears believe that the bubble could burst anytime soon. A game that has a definitive end in the near future. On the other hand, some enthusiasts feel the recent crash is just a minor setback. They still think that it has the potential to grow further in the future.

Can Dogecoin place itself as a reliable money system not limited to any particular state and government? Or will the influencers of crypto just have fun with it for a while and then forget about it for another eternity? Or will Dogecoin ever reach the $1 mark? Probably, Probably Not!

So the final question – whether to invest in this joke or not? Well, be clear about your investment goals first. It’s always a good idea to have a diverse set of investments for your portfolio which are harmless to your risk appetite. So ask yourself this – why do you want to invest in Dogecoin? To make instant money or a fortune that you see forthcoming?

Or maybe launch a crypto coin of your own. That is the sure-shot way to make some quick bucks.

                                                                   – – – – –

This article has been co-authored by Khubaib Abdullah and Yogesh Lakhotia, who are in the Research and Insights team of Torre Capital. 

Electric Mobility: Why the pandemic won’t hurt the resilient EV demand in the global markets?

by Sandeep Kumar

The nascent concept of Electric Mobility 

Electric mobility, or E-Mobility increasingly accounts for a large share of the global automotive industry and is changing the way the end-user comprehends mobility as a concept. Electric mobility, according to the definition of the German government and the National Development Plan for Electric Mobility (NEP) comprises all street vehicles that are powered by an electric motor and primarily get their energy from the power grid.

Drivers for adoption of this industry:

  • Minimized the use of traditional fuel
  • Reduced cost of high-capacity batteries
  • Shift in consumer preference towards EVs

Accessible market and impact of its growth

In 2019, electric mobility seemed poised to reach a tipping point. With more than two million electric vehicles (EVs) sold around the world, electric cars accounted for a record 2.5% of the global light-vehicle (LV) market. There were 10 million electric cars on the world’s roads at the end of 2020, following a decade of rapid growth. The global pandemic did cause a severe economic slowdown in the automobile industry. However, The EV market is much more likely to see a faster recovery and strong growth. EV charging infrastructure has also followed suit, last year it hit one of the biggest milestones by crossing the 1 million mark worldwide. Most of the new infrastructure has been built in China and Europe.  North America, with far less robust public subsidy and support, remains a distant third in the charging race.

 

Source: Bloomberg

New routes opening

Capital is the fuel for innovation and growth and the technological advance in the mobility tech has been able to attract it in abundance. Since 2010, venture investors have invested $148.4 Bn into mobility technology, with $44.7 Bn invested across 426 deals in 2018.This helped the capex heavy mobility businesses like Uber and Lyft in bringing innovations, and revolutionizing and disrupting the commercial transportation sector. Recent trends suggest that autonomous vehicles will be the next phase of disruptive mobility technology, with startups including Zoox and TuSimple poised to usher in a new era.

 

  • Regulatory policy: Governments have increased consumer incentives for EV purchases, often as part of stimulus. In Germany, for example, purchase-price subsidies for new EVs can amount to more than $10,000 per vehicle. In China, the purchase-price subsidy currently ranges from 16,200 to 22,500 RMB (approximately $2,350 to $3,265) by car.
  • Infrastructure Investment: In addition to subsidies and incentives, several governments and PE/VC firms have invested huge amounts in infrastructure and technology development projects.
  • Paradigm shift: In many countries the demand for EVs remained fairly stable during pandemic. EV manufacturers that offer online sales have seen particularly high demand since lockdown and social distancing measures kept people at home.

Miniscule presence of Electric Vehicles in India

Electric mobility was introduced in India in 2011 and over the last decade has been able to carve a space for itself in the mobility market, inevitably increasing its relevance in the lives of Indians. India is the fourth largest car market in the world and has the potential to become one of the top three in the near future – with about 400 million customers in need of mobility solutions by the year 2030.

Despite everything, EV industry in India is far behind, with less than 1% of the total vehicle sales. Currently, Indian roads are dominated by conventional vehicles and have approximately 0.4 million electric two-wheelers and a few thousand electric cars only.

 

The opportunities for Electric Mobility in the Indian Markets

Indian market has always prioritized mileage and upfront cost over all other factors. As a consequence, EVs were initially relegated to a very niche segment of the population. Another factor that contributed to this was lack of charging infrastructure.

However, recent technological development has attracted a plethora of entrepreneurs, ranging from budding start-ups to decades-old conglomerates. In addition to thisthey’re also creating new business opportunities for digital technologies like charging location finders and reservation applications, only on payments and ride-sharing services.

Ather Energy, a Bengaluru-based EV startup, develops and manufactures its own e-scooters, offers charging infrastructure through its Ather Grid, provides consumer services that include cloud software upgrades and new ownership models like subscription and leasing which are bound to attract customers. Backed by prominent names like Government of India’s Technology Development Board, Tiger Global Management and Hero Motocorp the company has attracted $166 Mn in funding.

Yulu,technology-driven startup, is solving the matter of first and last-mile connectivity. Yulu Miracle is a smart, dockless e-bike which is meant for urban traffic conditions. Yulu has collaborated with Delhi Metro Rail Corporation to supply their services in and around metro stations in Delhi. Mumbai Metro Region Development Authority has also signed an MoU with Yulu to supply e-bikes to Metro commuters at various metro stations within the city. The company is still in a nascent state and has managed to garner $54 Mn in venture funding from investors like Bajaj Auto, Binny Bansal and 3one4 Capital.

DOT, a Gurugram based EV logistics startup, supplies Electronic vehicles to major e-commerce and food-tech players like Walmart, Amazon, Grofers, Blue Dart, DHL, Lenskart, Swiggy and McDonald’s.

How the virus infected the industry?

The pandemic brought the fourth largest market to a screeching halt as operations were suspended due to government guidelines. China is one of the largest suppliers of EV components. Due to lockdown supply chains have been disrupted leaving a negative short-term impact delaying the adoption.

Another key risk is the falling crude oil prices. As social distancing norms and lockdown has forced people indoors the demand for crude oil has plunged. But this concern is much more valid in the shorter run.Oil prices in India are on a rise contrary to global prices which translates to higher running cost for traditional vehicles. In a price sensitive market like India this will encourage the shift towards Electronic Vehicles.

Significance and opportunities in an emerging market

A move to e-mobility can facilitate governments to go with international emissions targets (e.g., the Paris Climate Agreement). E-mobility can cut back the general energy needed by electrical vehicles and inside the transportation sector normally.

Benefits: Electrical vehicle makers (particularly in automotive) are always in the hunt to remain one step ahead than another. This often significantly results in immense numbers of innovations like improved energy potency, higher performance levels, and lighter vehicles, etc. To continue its widespread growth, the electrified vehicle should overcome vital challenges like battery autonomy, recharging networks, and its worth.

Challenges: Batteries area unit is one of the key challenges in automobile electrification. The problem lies within the raw materials from which the batteries area unit is made: carbon, lithium, and cobalt. Regions like Europe lack their sources of those minerals which is additionally dominated by China. Another challenge being the limited recharge points

Regulatory tailwinds to bring down cost and convenience hurdles

Considering the rise in congestion and the compelling need to reduce emissions, the governments have taken some decisive actions to encourage electric vehicles adoption. Countries like Germany and France have announced their plans to elevate the subsidies for electric vehicles. In an effort to boost electric mobility, the Chinese government has extended subsidies for electric vehicles until 2022 and created exemptions from purchase taxes.

China’s Ministry of Industry and Information Technology aims to augment the top line of electric vehicle sales, and has set a target for EVs to represent 25% of new vehicle sales by 2025. Tesla, BYD, NIO and Xpeng are amongst the major players in the EV market in China.

Many states in India are racing ahead through policy groundwork. Initiatives and campaigns like National Electric Mobility Mission Plan 2020, Scheme for Faster Adoption and Manufacturing of (Hybrid and) electric vehicles in India (FAME India), as well as [email protected] campaign are boosting the adoption of EVs.

Is the market open to adopting EV?

Yes, people are willing to make the sensible switch to EVs, provided there is a required infrastructure in place, policies that govern and support research development, charging infrastructure and skill development initiatives need to be undertaken. The provision of fiscal and non-fiscal incentives is often made, so as to increase the viability of EVs in the long run.These favorable policies are already having an impact on purchasing behavior and leading to more electric vehicle sales. Total electric vehicle registrations in Europe rose 127% YoY in July. Market forecast assumes electric vehicles achieve cost parity with gas-powered vehicles in 2025.

Does the performance justify cost?

Electric scooters are evidently more costly than their petrol counterparts and affordability comes at the price of shorter range, slower speed and inadequate service. However, an electric scooter will offer the same mileage as a petrol scooter at 15% of the cost of one liter of fuel, making it very pocket-friendly over the long-term. Relevance depends on the usage, they are a good option for short daily use, but they make little sense for long-distance rides with a limited number of charging stations.

The long-term route to Electric Mobility

Will the Electric Mobility market see continued growth worldwide? In addition to evaluating short-term changes, we should also understand long-term trends for EVs. Will regional differences continue to persist? If the current tailwinds for EVs in China and Europe continue, electric mobility could emerge from the COVID-19 crisis in an even stronger position than what was estimated pre-covid. In fact, regulations and incentives will likely propel EV market share in China to roughly 35 – 50 % and in Europe to 35% – 45%.

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This article has been co-authored by Ayush Dugar and Yogesh Lakhotiawho is in the Resarch and Insight team at Torre Capital.

 

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Zomato IPO: Analysing the future of the Indian Foodtech giant

by Sandeep Kumar

The future of Indian Foodtech is here

The food delivery and restaurant service tech giant, Zomato plans to go for an IPO this June or July. The IPO catches headlines, not just because of the amount being raised or the time when the IPO comes (both of which we discuss later), but also because Zomato could as well be the very first Indian Unicorn to go public. This shall be a momentous moment for not just the tech startup, but also for the entire startup community in India. The IPO could open doors to a new form of exit for the Indian founders and VC firms and cement India’s position as a startup friendly nation.

Zomato plans to raise over a billion dollars(!). This will be the biggest IPO since March 2020 after SBI Cards IPO at close to $1.3 Bn.

Business Model

Zomato was founded in 2008 as a simple restaurant reviews website. In 2015, Zomato entered a very crowded Indian food delivery space. Since then the landscape has changed completely. Out of the numerous startups (FoodPanda, TinyOwl, Scootsy, OlaCafe, UberEats) that were offering to deliver your food, chances are today you order food from one of these three: Zomato, Swiggy or Amazon (Amazon currently offers food delivery services in and around Bangalore). What happened to the rest? Well, most shut down, while the rest were acquired and then shut down. Barely a handful which were acquired by Zomato or Swiggy operate within, not independently.

Zomato acts as a restaurant discovery platform aggregating menus, dishes, user reviews and more. Zomato has nearly 3.5 lakh restaurants listings on its platform with more restaurants expected to join in as the pandemic and the induced lockdowns play a havoc on their dine in revenue streams. These restaurants pay Zomato a fee for greater exposure on the platform. The hope is, once a customer tried the food, chances are they will pay a visit to the restaurant. Now the pains and the faults in this premise make for a story for some other day. 

Zomato’s next line of revenue is the exclusive paid membership program very creatively titled “Zomato Pro”(earlier known as Zomato Gold), offering special discounts and/or free deliveries to is subscribed members. This membership model works how a gym does, take the membership fee and then hope the service is not utilised. Zomato has one advantage though, it can decide what discount to offer and/or what price to charge (dynamic pricing), based on traffic conditions, meal hours, order quantity etc. Zomato currently has 1.4 Million pro members and over 25k restaurants listed on Zomato Pro program.

Not all restaurants choose to be a part of the Zomato Pro program as these restaurants are also expected to offer discounts and offers on dine in options as well and maybe not all restaurants find themselves in such a position (again a story for some other day).

Zomato’s next stream of revenue comes from Hyperpure which supplies raw material to restaurants. This is a genius move in my opinion, at least theoretically. Zomato’s food delivery business allows it to forecast the raw material demands of a restaurant. Efficient buying practices and careful hedging (Zomato is in no position to carry out hedges against sharp commodity price movements, simply because it does not do enough volumes to justify this sort of a thing) can allow Zomato to up sell these raw materials, earning a constant cut.

If the hedging works, the restaurants are also set to benefit as they will receive a fixed price for their raw materials, allowing prior ordering. Zomato currently has 6000 restaurants on its Hyperpure platform in just two years.

And finally comes the last source of revenue (no need to be amazed, all this revenue does not trickle down to the bottom line), the delivery partners delivering your food. Here Zomato earns commission from the restaurants as well as the delivery charges from the customer (yes, all those extra delivery charges you paid and still these guys aren’t profitable…).

  Source: Zomato’s DRHP

Now Zomato does not give a breakup of how much revenue it makes from each segment, but nevertheless, most of the revenue comes from food delivery business, the ones you are the most aware of.

The not so straightforward Market Landscape

Food and restaurant Services is a competitive market in India comprising food delivery players like Zomato and Swiggy, cloud kitchens like Rebel Foods and branded Food Services players such as Dominos, McDonalds and Pizza Hut which. Food delivery players also compete with multiple other participants in the Food Services industry including restaurants which own and operate their own delivery fleets and both online and offline modes where restaurants place their advertisements to attract customers.

The food and restaurant industry in India is composed of three segments: delivery, take-away and dine in. Out of the three, the food delivery business is expected to grow most rapidly. While this was true even before the pandemic, the post pandemic has further cemented this.

 

Source: Zomato’s DRHP

During first half of 2020, the food delivery business contracted as India braced itself for the COVID lockdowns. However, once the lockdowns and the initial hysteria was over, a boost of business came to the food delivery business, not to the dine in or the drive way streams. This clearly is good for Zomato.

But things are not as straightforward for Zomato. This is because of how the food delivery business inherently is structured. Food delivery is more of ‘now pamper me’ kind of business and not ‘I don’t care what it is as long as it gets my thing done’ kind of business. Services such as Netflix or Zomato come in the former while services like Uber or Paytm which offer more of a commodity sort of service, come in the later.

One doesn’t really care who gets you from one place to the other or what app you used to pay someone, but one strongly cares what shows or movies a certain platform offers or which restaurant offers its dishes on which platform.

Source: Zomato’s DRHP

Zomato’s Financials

Let’s pore over the unit economics first. The number of orders placed on Zomato is largely driven by its customer base, restaurant partners and delivery partners. The number of orders is also subject to seasonal fluctuations and tend to be generally higher when customers may be less likely to dine-out as a result of unfavourable weather or during certain festival seasons and holidays when customers are more likely to order food for delivery.

Source: Zomato’s DRHP

The Average Order Value for Zomato has gone up over the last 7 quarters and stands at INR 407. The AOVs are higher for orders from premium restaurants. The orders have grown from 30.6 Million for 2018 to 403.1 Million for 2020. That’s a colossal 1200% jump in merely 2 years of time.

Source: Zomato’s DRHP

The change of heart and mind with increasing Unit Economics

Moving on to the unit economics of Zomato and we are welcomed by greener pastures: while last year Zomato lost INR 30.5 on every order made, this year Zomato managed to make a profit of INR 22.9 on each order. This has been achieved mostly on the back of.

  • increasing restaurant commission charges (remember the story for some other time 😉)
  • increasing delivery charges from the customer (sadly)
  • and cutting costs on deliveries and discounts (I swear I felt the last one pinch).

All this tight cost cutting and pressurising the restaurants for more commissions has led to this rather phenomenal turnaround.

And like most things in life, if it looks too good to be true, it probably is; many think such commission structure is rather unsustainable and Zomato won’t be able to sustain this for long. Whether or not Zomato manages to sustain this or not, the IPO, pre-IPO funding and special stake sale from Naukri.com is bound to flush Zomato with tons and tons and tons of sweet cash.

Source: Zomato’s DRHP

All this positive unit economics (whether or not sustainable) is yet to impact its bottom line (which continues to dive deep in red), Zomato seems to be right at the verge of hitting profitability. While the market is in no way saturated, as more and more people start making digital payments, internet becomes cheaper and smart phones penetrate the society even more, online food ordering is bound to keep increasing.

The increasing Turnaround of Customer Cohort

As the number of customers to acquire rises, it would prove to be a challenge to monetise each customer so well that each order’s unit economics turns in the green. Acquiring customers takes cash, and that too loads of it. What matters is whether or not Zomato manages to make money from its customers, which gets us to our next metric: Customer Cohorts.

Source: Zomato’s DRHP

Acquiring customers comes with a cost and that cost needs to be redeemed from each customer. This directly implies that the customer must spend on the platform, more than what the platform spent on acquiring him. The above chart shows that once the customer is acquired, he continues to stick to the platform. The bunch (cohort) of customers acquired in 2017 now spend 3X of what they did in 2017. This is pretty impressive given a lot of customers must also have churned.

So, with the unit economics turning positive, the question that still lingers is, why does Zomato still operate in loss?

For that we switch over to the financial statements.

Source: Zomato’s DRHP

Well, there are two ways to explain the huge losses. Firstly, the huge amounts of cash spent to acquire customers and the time lag between CAC and LTV of each customer. Customers take some time to monetise once acquired. The costs have already been paid, even before the customer start generating any revenue. All those acquisition costs get added up as we see in Other Expenses line item.

 

These Other Expenses are not really “Other”, they are the marketing spends and all the discounts that Zomato offers on its platform. This line item accounts for most of the customer acquisition spends.

The other major source of expense is the Employee Expenses. Well, maybe because Zomato pays its peeps well, who knows…

All of this requires cash, which Zomato happens to have truckloads of. The latest pre-IPO round got Zomato over $680 Mn. If the IPO goes as planned, Zomato may end up with $1.00 – 1.14 Bn more. A war chest of $1.7 Bn!

The shares of the company are going to be listed on National Stock Exchange of India. We expect that the shares will be listed at prices upwards of INR 60 per share. Previously the shares of the company were converted at a price of INR 58 per share.

Zomato plans to use most of its IPO crop in organic as well as inorganic expansion, offering discounts (yayy!), sales promotions, cementing its delivery network and thus acquiring more and more of both customer and restaurants.

That’s what $2 Bn is capable of. I would not want my competitors to have a $2 Bn advantage over me.

Which gets me to Zomato’s rivals…

Peer Group Analysis

The pre-IPO funding round in February 2021 valued the company at $5.40 Bn. Within the expected price range the IPO would value the company at $6.50 – $7.00 Bn. Taking EV/Revenue multiple into account and weighted average calculation of the comparable companies, we arrive at an NTM multiple of 8.76x which gives us an intrinsic valuation of 2.07Bn.

The Indian Food Delivery space is Duopoly: Zomato and Swiggy. Under the shiny apps, things twist and turn very differently.

For starters, the business approach of Swiggy is vastly different from Zomato. While Zomato wishes to service the entire restaurant supply chain, right from raw materials, to getting it delivered to your home, Swiggy assumes a different role.

Swiggy sees itself purely as a delivery aggregator. A delivery aggregator, that will deliver groceries, books, meat, alcohol, medicine, pretty much anything that fits into that Swiggy rider’s bag. Food fits, so it delivers.

This is important. Viewing from this angle, Swiggy becomes a delivery player, mimicking Delhivery in its business approach than Zomato! 

Food just happens to be what shot Swiggy to fame. Swiggy runs not a restaurant service business, but “I’ll find someone to deliver your stuff” business – a low cost, low capex, low overhead last mile delivery business, something which most players struggle to deal with.

Be reminded though, most of Swiggy’s revenue still stems from food. The IPO for Zomato is a big deal for Zomato, but an even bigger deal for Swiggy, which will force it to act. Acted Swiggy already has, raising a new funding round, but that’s no match for the $1 billion Zomato IPO. The IPO sets the scene for not just Zomato but Swiggy as well. A bombed IPO may as well hurt Swiggy’s IPO prospects.

There’s also a new kid in town, Amazon Food. Amazon Food, is like that rich kid whose mere presence threatens Swiggy and Zomato’s dominance. Things seem quite for now. Amazon only operates in Bengaluru, offers very low delivery fees and no packaging fees; and if you happen to be a prime member, you don’t pay that even.

And I get it. Maybe Amazon is not so much of a threat that I call it to be, but my fears are based on two reasons: firstly, Amazon. Yes. That’s it. Second, just as the dust from the numerous players undercutting each other settled, a new player enters the scene. Now it isn’t as if Indian market can’t accommodate these new entrants. The market’s expanding. But what all previous tech businesses have taught is, whoever lands first gets the bucks. Amazon with its existing, robust delivery network can very easily undercut its peers offering cheaper delivery and deeper discounts, as it seemingly has already started.

Will the IPO deliver in the same way Zomato does?

Zomato’s IPO is one the most awaited IPOs. The listing has come at a time when the Indian economy is going through crisis. However, being true to its foodtech giant status, the company has used tech extensively in operations, sales, marketing and automation, which has excellent operational leverage in the longer term, and tech company values tend to get a fillip.

– – – – –

This article has been co-authored by Khubaib Abdullah and Ayush Dugar, who are in the Research and Insights team of Torre Capital.

 

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