Zomato – Should you order?

In my view, there are a few big fundamental issues with the business.

1. Peak Margins – The company may struggle for many years to increase its margins. the commission they charge to the restaurants is already very high and the possibility to increase it is very very slim. Restaurants are not happy with the % delivery apps are charging them and some of them are already looking for alternatives to delivery apps.

2. Restaurant listing and placement on the app – The mobile screen is small and at a time only listed numbers of restaurants can be shown on the app. the restaurants which have paid promotions show up top, this means that there may be restaurants with better food out there but u might end buying from the restaurant with the top 5/10 in the search option. This is a disadvantage to the restaurants listed on the app and slowly they will realize this.

3. The restaurant business may have gone higher however that has been offset by the commissions they pay to delivery apps and the upfront fees to list themselves. my friend used to run a cloud kitchen in Bandra and i have the costs of delivery apps on the margins. they had to shut down eventually because they were tired of all the discounting happening during that time. this was in 2018-2019.

now that they are listed they will be answerable to analysts and institutions and their cards are in the open. Capital Markets are about efficient use of capital and those who so over manage to do that get the vote of the investors.

All those huge cash burns ideas are not going to fly now. it can be a good buy at its price to book value of 21 rs.