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The Indian Startup sector, the technology startup segment in particular has witnessed tremendous growth in recent years. The number of Unicorns rising out of this particular segment is on a particular rise. Adding on to the development in the segment, Zomato, a food aggregator platform has now filed its draft red herring prospectus (DRHP) with market regulator Securities and Exchange Board of India (SEBI), proposing an initial public offering (IPO) of INR 8,250 crores. In today’s edition, we take a look at Zomato’s ownership, its financial condition, the IPO and subsequent plans, and how SEBI will play a key role in regulating the IPOs of loss-making technology startups.
Who Exactly Owns Zomato?
Founded in 2008 by two graduates from IIT Delhi, Zomato has raised $2.1 billion to date, of which $910 million was invested in the last 12 months as the company planned ongoing public this year. It ended 2020 by closing a $660 million round, at a valuation of $3.9 billion. Then again, it raised $250 million (over INR 1,800 crores), at a valuation of $5.4 billion. Sources aware of the development say that Zomato aims to hit an $8 billion valuation with its IPO.
As per the regulatory filings made by the firm, Zomato has over 74 shareholders, of which 18 hold more than 1% share. Cumulatively, these 18 investors account for 5.9 billion shares or 89.33% of the shareholdings in Zomato.
Info Edge is the largest shareholder and controls 18.5% in the company, followed by Uber B.V. holding 9.13% (which it acquired during Uber Eats’s acquisition by Zomato last year), with Alipay Singapore Holding Pte. Ltd and Antfin Singapore Holding Pte. Ltd holding close to 8.33% and 8.22% in the company respectively.
Zomato’s co-founder Pankaj Chaddah, who held about 93 million shares equating to 2.06% shareholdings, had sold off his shares during the Uber Eats acquisition and Uber acquiring a stake in Zomato. In this process, Zomato’s CEO Deepinder Goyal also diluted his shareholdings from 9.05% to 7.96%. As Zomato’s cap table expanded further to 74 shareholders in the last year, Goyal’s equity shares were further reduced, taking his shareholdings to 5.51%.
What Do the Books Say?
Zomato, like every other technology-based startup whose target has been customer acquisition, has reported losses for the last three fiscal years. For the nine-month period ending December 31, 2020, the company reported a loss of INR 6,82.20 crores. Before that, for the fiscal year 2020, 2019, and 2018, the company has reported losses of 2,385.60 crores, INR 1,010.23 crores, and INR 106.91 crores, respectively, as per draft papers.
The average order value rose over 40% to nearly INR 400, which resulted in an increase in commission earned on a per order basis. The company also increased delivery charges billed to customers. In FY20, only 30% of actual delivery costs were billed to customers. This was increased to 60% in FY21. Another major saving came in the form of lower discounts. On a per-order basis, discounts were cut to merely a third of FY20 levels. While Zomato did well on costs, it hasn’t seen the rapid growth reported by some global firms such as Doordash. Gross order value stood at INR 2,981 crores in the December 2020 quarter, up 7% year-on-year. In the case of Doordash, which had a blockbuster IPO last year, revenues had more than trebled in the December 2020 quarter.
While cash burn has reduced meaningfully in the first 9 months of FY21 to INR 272 crores (versus INR 2,165 crores in FY20), the high cash balance may well prompt another round of discounting to drive growth. The fact that a number of private equity investors are staying put and aren’t selling in the IPO suggests they are in for the long haul as well.
Where Will the Money Go?
As per the DRHP, the company will be issuing fresh equity shares worth INR 7,500 crores, along with the company’s early backer Info Edge India Ltd selling its stake worth INR 750 crores, in Zomato's upcoming public offering. The company plans to use INR 5,625 crores worth of the net proceeds (including pre-IPO funding) towards funding organic and inorganic growth initiatives.
“We expect our costs to increase over time and our losses will continue given significant investments expected towards growing our business. We have expended and expect to continue to expend substantial financial and other resources on, among others, advertising and sales promotion costs to attract customers and restaurant partners to our platform, developing our platform, including expanding our platform’s offerings, developing or acquiring new platform features and services, expanding into new markets in India, and expanding our delivery partner network," said Zomato in its DRHP.
Loss-making Startups and Sebi’s Role as Regulator
For a tech-based company like Zomato which has to burn a lot of cash in order to acquire consumers by offering them discounts and other benefits, profit generation is not possible in the initial years of its operations. IPOs of such companies then become a risky investment for the retail sector as they may not be able to turn profitable in near future.
The Securities and Exchange Board of India (SEBI) is considering the concept of institutional investor-only initial public offerings (IPOs) to shield small investors from presumably risky issues by new-age technology and e-commerce firms. Investment bankers’ lobby group Association of Investment Bankers of India (AIBI) in the past had made a representation to SEBIto allow institutional investor-only IPOs — a concept prevalent in developed markets, such as the US. The regulator in the past had been averse to the idea, fearing a backlash from the public. However, as companies that are unlikely to turn profitable in the near future look to go public, SEBI is seeing the idea in a new light, said investment bankers.
SEBI has actively been taking measures to protect the retail investor in case of IPOs by loss-making tech companies. During Justdial's IPO, SEBI intervened and asked the company to provide a safety net to its retail investors. “As the company is from a new sector, Sebi asked us to provide a safety net to safeguard the interest of retail investors,” said an investment banker handling the issue. Under the voluntary ‘safety net’ option, a company has to refund investors if the market price falls below the issue price 60 days after listing.
With a loss-making tech company now eyeing a valuation as high as 10 Billion dollars after its IPO, the Equity Market is surely evolving and is preparing itself for the newer kind of investment opportunities. Paytm is now preparing for the biggest ever IPO in the Indian markets. It will be interesting to see how the investors, retail investors, in particular, react to this new opportunity. What will also be interesting to watch is how SEBI can regulate such tricky IPOs and maintain a balance between the protection of rights on investors, and promoting and facilitating startups.
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