Zomato: fast delivery, faster investor reward

Zomato Ltd is known for its quick delivery, but investors in its shares seem equally fast or even faster in rewarding the online food delivery company’s financial performance. At least, that’s the impression one gets going by the 12% surge in the stock on Friday reacting to the positive surprises in the June quarter results (Q1FY25).

This time around, the strong customer addition of the food delivery segment, which is already profitable at the adjusted Ebitda (excluding Esop) level, is commendable. Esop is employee stock ownership plan and Ebitda is earnings before interest, taxes, depreciation, and amortization.

Before Q1, the segment’s sequential growth in average monthly transacting customers had been tapering consistently for the past four quarters with growth at 1% in Q4FY24. In Q1, sequential growth has bounced back to 7% to 20.3 million, contributing to the 10% jump in the gross order value (GOV). This suggests that performance could be better if the take rate from restaurants tops out.

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Adjusted revenue (including net delivery charges and platform fees) as a percentage of GOV has been flattish year-on-year as commission from restaurants plateaued and growth was largely owing to the hike in platform fee and ad revenue. The rebound in customer base growth rate should help Zomato’s management to achieve its guidance of at least 20% GOV growth in future and Ebitda margin target of 4-5%. In Q1, GOV growth and Ebitda margin was 27% and 3.4%, respectively.

Coming to the quick commerce arm Blinkit, which had seen early signs of adjusted Ebitda breakeven in Q4FY24, the GOV growth of the business was almost in tandem with the number of orders in Q1. The sequential GOV growth was 22% at ₹4,923 crore and customer base was up 19%. The business reported a small loss of ₹3 crore at adjusted Ebitda level.

They confirmed the view shared by Avenue Supermarts Ltd’s management that the value focused large retail player is not losing out especially in staples category where price sensitivity is higher. Blinkit is also not gaining business of kirana stores offering personalized service with credit facility.

“The value focused items available in these formats are hard to replicate in our business; especially in categories like staples, where price sensitivity is higher and we don’t have the ability to sell open SKUs that brick and mortar can,” said Zomato. SKU stands for stock keeping unit.

Notably, Blinkit’s adjusted Ebitda loss is lower sequentially despite higher operating cost due to the addition of 113 new stores. The company is on track to reach its target of 1,000 stores by FY25 and has reached 639 already. The GOV throughput of the top 50 stores is at ₹18 lakh a day, which leaves room for productivity improvement as the remaining stores are at ₹10 lakh.

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Meanwhile, noting analysts’ concerns on the rise in Esop cost, the management reiterated that the expected increase in combined employee cost (including cash expense and non-cash Esop charge) as a percentage of adjusted revenue will continue trending downwards in FY25 and beyond. It has already come off to 12% in FY24 from 29% in FY22 and is expected to be 6-8% in FY26.

Despite the strong growth and improving profitability, a few brokerages like Macquarie are concerned about the quick commerce space getting crowded. They worry about the increased competition from Jio Mart as it is planning to offer 30-minute delivery. Rivals like Zepto are also catching up fast given that it saw five-fold year-on-year growth in revenue to ₹10,000 crorein FY24.

Overall, even as Zomato’s rapid rise in revenue continues, it is being valued at more than 10 years revenue based on Bloomberg consensus for FY25. But companies are generally valued on Ebitda or net profit multiple, which for Zomato, works out to 200x FY25 estimates.

That’s pricey.

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