Is Zomato burning out Investors money without turning into Profitability? 😓 जोमैटो में निवेश करना चाहिए या नहीं?

  1. Company & Business Strength: 9/10

Zomato is an Indian food delivery and multinational restaurant aggregator company founded in 2008. Zomato was initially founded as Foodiebay in 2008 and was renamed Zomato in 2010 as Zomato Media Pvt. Ltd Zomato provides information, menus, and user reviews of restaurants as well as food delivery options from partner restaurants in select cities. The service is available in 24+ countries and in more than 10,000+ cities.

In 2011, it expanded across Indian cities like Delhi NCR, Mumbai, Bangalore, Chennai, Pune, and Ahmedabad. From 2012 to 2015, it expanded operations internationally in several countries, including the United Arab Emirates, Sri Lanka, Qatar the United Kingdom, the Philippines, South Africa, New Zealand, Turkey, Brazil, Indonesia, Portugal, Canada, Lebanon, and Ireland.

In 2015, the firm acquired Seattle-based food portal Urbanspoon, which led to the firm's entry into the United States and Australia. This U.S.-expansion brought Zomato into direct competition with similar models such as Yelp and Foursquare.

In 2019, the firm fired almost 10% of its workforce tending to back-end activities like customer service, merchant, and delivery partner support functions. In April 2020, due to rising demand for online groceries amid the pandemic, the firm launched its grocery delivery services named Zomato Market in 80+ cities across India.

In April 2020, Zomato introduced contactless dining to get ready for a post-lockdown world, by eliminating the use of high-touch elements such as the menu, ordering, and bill payments through bar codes or the app while the staff will wear masks.

In 2020 again, Zomato's given reasoning for needing cuts is that coronavirus will be followed by an economic downturn, which could hit orders.

On 23 July 2021, Zomato went public, opening its Initial public offering at a price band of Rs 72-76 per share.

Business Segment:

The business model of Zomato is quite different from that of other food delivery companies such as Swiggy and Foodpanda.

The business model is based on providing local restaurants search services and collecting data on food menus, and contacts, and providing relevant information to their customers. The main channels for Zomato are mobile applications and online websites. The target audience of the company is the users who try to find local restaurants of various cuisine and restaurants who want their name to reach a large number of people.

Restaurant Listings and Advertising

Zomato first started out as a restaurant search and rating service. For this Zomato charges commissions from restaurants that want to be placed on the feed. Advertising is another major source of revenue for Zomato. The restaurants can promote their banner on the site to get better visibility and appeal to a large section of the audience via Zomato.

Food Delivery

Through the food delivery business, Zomato charges a commission to the restaurants based on orders.

Subscription programs

This is also a major source of revenue for Zomato is a subscription fee. Restaurants pay a certain amount fee monthly and in return, Zomato offers analytical tools.

White Label Access

The next source of revenue is app development. Zomato launched a service called Zomato Whitelabel under which they give offers to restaurants to develop and customize food delivery apps.

Live Events

Zomato has forayed into the events space by partnering with restaurants and creating limited events. By which they made a sale through the price of the tickets. 

Zomato Gold

Zomato Gold is a premium subscription-based service which is offered by Zomato. It started in 2018 and is a paid service that allows customers with Gold memberships to get complimentary food and drinks at the time of ordering from partner bars or restaurants.

Zomato Kitchens

Zomato also provides kitchen infrastructure services to select restaurant operators, it works with entrepreneurs to set up and operate Zomato kitchen under various other labels.

2. Competitive Strength: 9/10

Zomato Ltd is an eCommerce/ New Age Tech company, it has competitors like IndiaMart, Paytm (One 97), Nykaa (FSN eCommerce), Info Edge, Justdial, and others.

Although direct competitors are mostly unlisted like Swiggy and others.

The eCommerce sector has always been competitive.

3. Stock Analysis Return & PE Ratio: 3/10

Zomato Ltd Stock is listed both on NSE, and BSE and currently trading around 100 (Jan 2022), with 52 highs of 169s and lows of the 90s.

It has a market cap of 79000+ which is a Large cap, Stock has been very volatile after the IPO listing in 2021 and has not generated any return since.

The stock has given a -35% return in the last six months. Although we should not decide based on a very short period.

The face value is 1, so expect bonuses and buybacks.

PE Ratio: Zomato has a PE of 0 (Negative) currently which is due to no earnings. 

4. Dividend: 1/10

The stock has not given a dividend (0%) after listing. Generally, we expect a growing company to give atleast 1% dividend which is a good gesture and sign unless high Capex is planned.

Financial Ratios:

5. Sales Growth/Revenue: 7/10

The Sales growth indicates that the company can capture the market, and which may increase profitability. 

Zomato Ltd has a 3-year median Sales growth of 66.54% which is exceptional. Current year (2021) growth stands at -26.64%. For Large caps, we consider the growth of atleast 15%+ as healthy sales. 

6. Profit Growth: 3/10

Sales growth indicates a good income, but unless profit is not made it's terrible. Profit growth indicates how expenses are managed or also how the company has pushed the raw material prices to end customers.

Zomato Ltd's Profit growth stands at a 3-year median of -310.2% which is bad, Current year stands at 63.85%. For a Large cap, atleast 15-20+%+ is considered healthy growth in Profitability.

7. [ROE] & [ROCE] %: 2/10

Return on Equity:

ROE indicates the ability to generate profits from shareholders/Equity Investments. Zomato Ltd's ROE has a 3-year median of -79.11%.  The current year stands at 22.92%. 

We consider a healthy ROE to be atleast 20% for growth companies.

Return on Capital Employed:

ROCE indicates the ability to use its capital employed for business. Zomato Ltd's ROE has a 3-year median of -64.72%.  The current year stands at -19.38%. 

We consider a healthy ROCE to be atleast 20% for growth companies.

8. Debt/Equity: 10/10

D/E is a measure of which a company is running through debts vs owned funds. Ideally, D/E should be less than 1, which indicates stability. 

Zomato Ltd has a D/E of 0 which is Great. Unless capital expansion or any other is required, a low debt is always good to maintain profitability.

We consider debt-free or D/E<0.1 to be healthy. 

9. Shareholding %: 9/10

The company has a Promotor holding of 0%. The FII and DII of 11.04% and 4.64% indicate Institutions have good holding, Although the promotor is 0% it is mainly held by Public companies like Info edge (15%) with major, the rest include other strong holdings from Uber, Alipay Singapore, Antfin Singapore & others. 

Note: The Promoter Pledging % is 0% which is good, generally no pledging indicates a good sign.

The other indicator like interest coverage ratio, Return on Assets[ROA], and others also seems not very good.

10. Future Prospects: 9/10

Pros:

India is projected to have high growth in food delivery in the future due to high urbanization and a young workforce. Zomato is also one of the leading in India and would be benefitted the most too. So the future may be very bright but the short term may not be good.

The company is debt free and also has good reserves.

Good revenue growth in the last 3 years.

Cons:

High valuation due to hype of far future growth.

Poor financials in terms of profit, ROE, ROCE, etc.

Short-term expenditure in terms of advertisement etc for brand and market capture.

Investment Hacks Score Card: 

The average score of Zomato Ltd based on all factors comes to be 6.2/10.

Conclusion:

Overall Zomato Ltd seems to have a good Business Model, Customer and Restaurant database, and Research. The stock has not given any return to shareholders from listing and in fact, is listed at a high valuation due to future growth. Although this is Large cap stock, Investors can see volatility in the future due to high expectations and should carefully watch future plans and growth.

The business may really grow in the future due to growth in the food delivery space and an excellent business model but may see uncertainty in a short period. So Investors should have a long-term vision.

Disclaimer:

Since this is an educated opinion, Please research thoroughly or consult your financial advisor before Investment.

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Team Investment Hacks