Zomato stock up 23% since Q1 results: Is there more steam left

Food aggregator Zomato has had a good week so far with the stock up over 20 per cent, after bearing the brunt last week on expiration of lock in period for pre-IPO investors.

The company reported a loss of ₹185.7 crore for Q1 FY23, narrowed down 48 per cent from the ₹359.7 crore loss reported in the same period last year.

Revenues from operations stood at ₹1,413.9 crore, witnessing a 16.67 per cent quarter-on-quarter (QoQ) increase. This growth was driven by a 9.9 per cent QoQ increase in gross order value (GOV-total value of orders including taxes, and customer delivery charges) and an increase in revenue per order.

GOV growth is imputed to robust growth in order volumes and a mild growth in average order value (AOV–total value of orders divided by the number of orders) compared to the previous quarter.

A 35.7 per cent year-on-year (YoY) growth in average monthly transacting users (number of unique transacting customers that have placed at least one order that month) is likely to have driven growth in order volumes.

Although revenues were in line with Bloomberg consensus, the company outperformed operating loss estimates. Operating loss came in at ₹348.9 crores vis-à-vis an estimate of ₹434.2 crore.

Break-even on adjusted basis

The company also reported adjusted EBITDA (EBITDA excluding share-based payment expense) break-even for the food delivery arm (76 per cent of revenue) during the quarter compared to a loss of ₹80 crore (-1.3 per cent of GOV) in Q4 and a loss of ₹120 crore (-2.2 per cent of GOV) in Q3 of FY22.

This could be attributed to a few reasons. One is the increase in contribution (the amount by which revenue exceeds variable costs) as a per cent of GOV to 2.8 per cent compared to 1.7 per cent in the last quarter and a reduction in advertisement and sales promotion expenses as a per cent of revenue, from 22.2 per cent in Q4FY22 to 19.6 per cent in Q1FY23.

Additionally, employee cost optimisation is a key factor, both in absolute terms and as a per cent of revenues, decreasing from 33.6 per cent (as a per cent of Q4FY22 revenue) to 24.7 per cent (as a per cent of Q1FY23 revenue).

Another noteworthy factor contributing to elevated profitability is the steady growth of the Hyperpure business (19 per cent of revenue), which reported a revenue of ₹272.7 crore in the June quarter, growing by 40 per cent sequentially.

Founder and Chief Executive Officer, Deepinder Goyal along with Chief Financial Officer, Akshant Goyal said in an investor call that the focus is shifting toward better unit economics and has plans of reaching a positive adjusted EBITDA figure for all segments of the company by Q4 of this fiscal year or by Q2FY24 at the latest.

Zomato’s share price soared over 18 per cent on Tuesday and closed at ₹55.55 in the BSE, a day after it reported strong Q1 earnings. It has traded flat since then. This, however, is still around 25 per cent below its IPO price of ₹76.

A recent Jefferies report viewed breaking even in terms of adjusted EBITDA, better unit economics and the consolidated industry structure as significant positives for the company. The analysts also expect to see a consistent improvement in profitability and believe the company has a long runway for revenue growth, thus reiterating a buy rating.

Kotak Institutional Equities Research in its buy call at CMP 44 stated that cumulative cash burn in the food delivery and quick commerce businesses, lower contribution margins in the food delivery business and nil value accretion from the existing minority investments as well as Blinkit, taken together were indicated in this price, but still is a bearish scenario, presenting a buying opportunity for investors.

Zomato’s management said the company is looking to integrate products and features in the medium/long-term to increase user frequency, thereby reducing their dependence on loyalty programs (Zomato Pro), stabilising its CAC (customer acquisition costs) which were previously very skewed and focusing on quality and real-time delivery.

Yoggesh Aggarwal and Abhishek Pathak of HSBC Securities and Capital Markets mention in their report that building synergies between food delivery and instant grocery businesses is the key.

“Zomato has to build its grocery capabilities quickly and in our view has to merge the apps effectively to leverage its customer base for grocery. Running it separately is unlikely to create much value as CAC will be high for Blinkit, with inferior customer stickiness” the report added. Moreover, the analysts view food delivery as a relatively mature segment with a healthy duopoly structure and clear value proposition, recommending a buy.

On the other hand, a Dolat Capital report presents the view that persistent losses in the past, expected continuation of the cash burn in near future (with Blinkit) and an unclear path to profitability will lead to modest cash generation and profitability, giving a ‘sell’ rating on the stock.  

The writer is an intern with BL Portfolio

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