Zomato Rating- Hold - Profitability at the cost of growth

Zomato Rating: Hold | Profitability at the cost of growth

Zomato’s food delivery gross order value (GOV) grew 3.1% q-o-q and 22.6% y-o-y in Q2FY23. This is meaningfully lower than the GOV trajectory over the last four quarters (Q1FY23 GOV grew 9.9% q-o-q and 41.6% y-o-y). We believe this was a result of focus on profitability. Food delivery business contribution to GOV improved to 4.5% in Q2FY23. Adjusted revenue (food delivery) grew 7.6% q-o-q and 26.5% y-o-y. Food delivery business reported breakeven (post restatements) in Q2FY23 after adjusting for what was previously classified as unallocated expenses. Management clarified that the target for adjusted Ebitda is 4-5% of GOV which roughly translates to a segmental Ebitda margin in the range of 15-20% according to ICICI sec. This, we think, is lower than consensus estimates. The management has also guided for slower improvement in contribution going ahead as most ‘low hanging fruits’ have been pocketed.

Take rate improvement (food delivery) could be mutedWe estimate take rate from restaurants increased ~70bps q-o-q in Q2FY23. For the first time the company has reported a decline in the number of average monthly active restaurants. Therefore, we think that take rate improvement could be limited over the next two, three quarters. Management has guided for Ebitda breakeven for ex- Blinkit business of Zomato in the next 2-4 quarters (by Q2FY24).

Hyperpure continues on steady growth path.Zomato’s B2B unit ‘Hyperpure’ business grew 23% q-o-q and ~200% y-o-y in Q2FY23. This is in line with our thesis around strong growth in B2B e-commerce over the next 2-3 years. Adjusted Ebitda losses increased to `53bn in Q2FY23 with a q-o-q Ebitda margin of -16%.

Blinkit businessBlinkit business performance surprised positively with 17.6% q-o-q improvement in the number of orders and 7.6% q-o-q improvement in average order value (AOV). We think the management’s guidance towards attaining Ebitda-breakeven for Zomato business by Q1FY24 would require careful calibration of employee expenses and marketing spends. We estimate Ebitda margin of -1.3% for FY24E. Hyperpure business (B2B e-commerce vertical of Zomato) is likely to benefit from growth in the overall segment. However, scale-up of Hyperpure will be contingent on significant investments in building refrigerated supply chains and technology for tagging and batching of fresh farm produce. We maintain HOLD rating on the stock with DCF-based TP of Rs 65.