Co founder Gaurav Gupta exits Zomato

Zomato shares have been in focus over the last few days after the company’s co-founder Gaurav Gupta resigned from the company. Here are the details: 

What are the concerns around Gupta’s exit?

• Gaurav Gupta, cofounder of Zomato, who headed the food delivery firm's supply vertical, resigned on 14 September after holding multiple roles in the company. Gaurav joined the food-tech startup in 2015 and was appointed as the Chief Operating Officer in 2018. In 2019, he was named the cofounder.
• Ahead of its recent IPO, Gaurav Gupta was the face of the company, leading discussions with investors and the media. 
• The timing of the exit also assumes importance, as it comes just days after Zomato had announced that it will exit its grocery delivery and nutraceutical businesses. Nutraceuticals include dietary fibres, antioxidants and herbal and natural funds. Incidentally, these were the businesses that were spearheaded by Gupta, according to media reports. 
• In the last six years, Gaurav has been the one to lead Zomato’s expansion into overseas markets. However, even these ventures have not worked out for the company. 
• Since the launch of the IPO, Zomato has been trying to get as lean as possible by cutting out the failing segments. Zomato decided to shut down its nascent grocery delivery service due to gaps in order fulfillment, poor customer experience and increasing competition from rivals promising express delivery in 15 minutes. Stricter government regulations on private label norms for marketplace businesses was a major factor playing against the company. 
• However, he has also brought major successes to the company. Last year, in the middle of the pandemic, he helped onboard 120,000 restaurants on the platform. He was also a part of the team that launched Zomato Pro and looked at ways to improve the merchant experience on the platform.
• “It’s time for me to take an (alternative) path in my journey,' said Gupta in a letter shared by Zomato regarding his exit. 

Impact of his exit

• Following the news of the co-founder's exit, the stock price of Zomato fell by 10% on Tuesday touching Rs 136.20, however closing at Rs 144.10. 
• This is the exit of the second co-founder in the last few years. Zomato’s Pankaj Chaddah, who co-founded the company along with Goyal as Foodiebay in 2008, had resigned in 2018. 
• According to global firm Morgan Stanley, the announcement of departure of a key management personnel comes as a negative surprise. However, it noted that Zomato has handled other exits well in the past without material impact on the company’s business.
• Morgan Stanley has maintained an ‘Equal-weight’ rating on the shares with a target price of Rs 140. 

Zomato outlook

• The company has recently raised Rs 9,375 crore through its blockbuster IPO in the second week of July. 
• Following the IPO, the company had announced that it had picked up a 10% stake in Grofers. They have acquired a 10% stake in Grofers very recently. According to Elara Capital the move will help Zomato to capitalize on their delivery tech capability and expand the grocery business rather than do it on their own, as there is very high competition. 
• In its maiden quarterly result, the company has reported revenue of Rs 844 crore in the June quarter, increased from Rs 266 crore in the same period a year ago. The losses widened to Rs 356 crore in the same period, compared to Rs 99.8 crore a year ago.

Going forward, the markets would await clarity on whether Zomato would further increase its stake in Grofers. Further, investors would also watch for the company’s unit economics. Given the high competition in the space, investors would look for clarity around reducing the discounts. The industry is highly competitive and is subject to steep discounting leading to a huge cash burn. Being that it is the only listed online delivery player, the company continues to trade at very steep valuations.