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Zomato reported better-than-expected operating performance in Q4 – while it registered muted GOV growth QoQ, contribution margin across segments beat estimates. Food-delivery GOV declined 1.7% QoQ to Rs65.7bn in Q4, impacted by: i) February being a shorter month (-220bps), and ii) shutdown of Zomato services in ~225 cities in Jan-23 (-30bps); adjusted for this, GOV grew 0.8% QoQ. Management expects sequential GOV growth to be in a high single digit in Q1FY24, on the back of green shoots of recovery since Feb-23. Management guides for positive adjusted EBITDA and PAT on a consolidated basis (incl. quick commerce) within the next four quarters, and plans to achieve this via: 1) profit growth in the FD business; 2) loss reduction in Blinkit. It aims to expand fooddelivery EBITDAM to 4-5% of the GOV from the current 1.2%. The superior Q4 performance bolsters our belief in Zomato’s ability to execute & deliver profitable growth. Improvement in consumer sentiment is expected to drive GOV/MTU growth. We maintain BUY on Zomato with TP of Rs90/share.

Results summary: Revenue grew 6% QoQ to Rs20.6bn in Q4, led by growth in Hyperpure (13%) and the quick commerce business (21%). Adj. revenue grew 2%/57% QoQ/YoY to Rs24.1bn, while adj. revenue ex-quick commerce declined 0.6% QoQ but grew 33% YoY to Rs20.5bn in Q4. Adj. EBITDA loss reduced to Rs1.75bn (-7% of adj. revenue) in Q4 vs. Rs2.65bn (-11% of adj. revenue) in Q3. Adj. EBITDA ex-quick commerce turned profitable to Rs0.3bn (+1% of adj. revenue) in Q4FY23 vs. loss of Rs0.4bn (-2% of adj. revenue) in Q3, driven by the food delivery business generating Rs0.78bn of adj. EBITDA. Despite launch of Zomato Gold, food delivery’s contribution margin (as a % of GOV) improved to 5.8% from 5.1% in Q3, driven by continued progress across revenue and cost levers. Hyperpure revenue grew 13%/146% QoQ/YoY to Rs4.8bn in Q4. Zomato introduced delivery charge below a certain minimum value in Q4, leading to churn in restaurants ordering from Hyperpure. This, in turn, resulted in improvement in the overall business profitability. Blinkit’s revenue grew 21% QoQ to Rs3.6bn in Q4. What we liked: improvement in profitability across segments; continued traction in Blinkit. What we did not like: GOV growth moderation; decline in avg. MTU.

Earnings-call KTAs: 1) Avg. monthly transacting customers declined 4.6% QoQ to 16.6mn, attributable to Zomato’s strategic call of churning out the bottom few percentile of unprofitable customers and to lesser days in February. 2) Zomato Gold membership has scaled to 1.8mn members in Q4. Management indicated that such members comprise ~30% of the total GOV as of Mar-23, and the average order frequency of such customers increased by ~60%, post their becoming members. 3) Blinkit’s contribution margin (as a % of GOV) improved to -2.7% in Q4 vs -17.3% in Q1, driven by increase in commission as well as better ad monetization and higher throughput per store leading to reduction in number of dark stores and in the replenishment cost per order. 4) Blinkit’s AOV declined to Rs522 in Q4 vs Rs553 in Q3. Company believes that AOV will continue fluctuating in the near-to-mid term due to seasonal factors. It expects the AOV to increase QoQ in Q1. 5) In Mar-23, >65% of the Blinkit GOV was from contributionpositive stores. A few stores have even crossed the 5% contribution margin and Mgmt expects this to pan out across “the mature parts of the network” too, in future. 6) Company expects limited impact (<1% of revenue) from delivery partner strike at Blinkit. 7) Zomato has announced leadership changes wef June 1, 2023 which are: i) Rakesh Ranjan as CEO - Food ordering and delivery business; ii) Rinshul Chandra as COO - Food ordering and delivery business; iii) Rishi Arora as CEO - Zomato Hyperpure.

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