Zomato QIP is IPO 2.0 but not much has changed in terms of fundamentals

After last raising cash over three years ago, new age startup Zomato is back at it. It will be raising Rs 8,500 crore through a qualified institutional placement (QIP), only a little short of the Rs 9,000 crore it raised in its IPO in 2021. The company has many good things to show for it: newly gained net profitability (for six quarters), exhilarating growth in gross order value and revenue, and a 3.5 times jump in the share price!

Getting the funds will not be tough. But the puzzling part is what a cash-rich, debt-free company that has over Rs 12,000 crore of liquid assets (Rs 10,333 crore in bonds, mutual funds, company stakes) needs more cash for?

The management says it's to "strengthen the balance sheet and ensure a level playing field with competitors, who continue to raise additional capital". The balance sheet is already strong, so we assume it has more to do with the second reason.

Why the QIP

As acknowledged by the management, the timing of the fundraiser is no coincidence. Zomato's rivals are raising enormous amounts of money. Swiggy will raise Rs 3,750 crore in its coming IPO, while Zepto recently closed its latest funding round of over Rs 8,000 crore. Going by media reports, the slew of industry-wide fundraisers is to weather competition in the quick delivery segment that is intensely heating up.

Zomato is keeping up. The management is perhaps anticipating an impending shakedown in the business environment, given the monies that its rivals are infusing, thus preparing its own warchest.

Quick delivery, the crown jewel to be

Zomato's quick delivery business Blinkit is its next crown jewel. It is growing at a much faster pace than the traditional food delivery business. Blinkit made up over 24 per cent of Zomato's total revenue in H1 FY25. The management is confident that Blinkit will eventually overtake the food delivery business.

The company targets to open 2,000 Blinkit dark stores by December 2026, up from 751. It is also developing warehouses to expand operations, manage its own inventory, and offer a wider product range. The QIP money will likely fund these plans. But the company is yet to figure out the unit economics as Blinkit remains EBITDA negative. The company says ramping up of new dark stores is keeping the business margin dilutive at the aggregate level.

Add to this the aggressive competition and the path to profitability looks more challenging. Swiggy (Instamart) and Zepto are right behind Blinkit in the quick commerce segment. Their recent fundraise makes the rivalry more heated in the tight-knit market, where deep discounts are a common practice and market share is ever-changing. Then, there are other giants like Flipkart, Jio Mart, Amazon and Big Basket also vying for a share.

In effect, none of these companies have a unique moat. They are all simply fighting for market share while rapidly burning cash. Zomato managed to garner astounding D-Street gains as soon as it turned a net profit a few quarters ago. However, investors need to remember that its profitability is primarily due to other income, not the core operations. Zomato's profit, without other income, actually turned positive in just the recent two quarters. And yet it is a paltry 0.2 per cent of the revenue (H1 FY25).

Your takeaway

We expect the QIP money to be used the same way the IPO proceeds were: for rapid cash burn to maintain the quick delivery market leadership. However, the strategy has yet to translate into healthy and steady profit conversion. It took the food delivery business more than a decade to turn EBITDA positive. Blinkit seems to be on the same long path. Remember at the company level, other income from its investments is the primary contributor to the net profit.

In a world of non-startups, giant fundraisers are generally positive signs. That a company is going to allocate money for expansion and growth is good news. But when the goal is to survive an onslaught of ruinous competition, it highlights the unsustainable nature of the business. For investors, the QIP further means equity dilution. Which would mean lower earnings (EPS) even if the company reports higher profit in coming quarters.

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