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We reinitiate coverage on Zomato with a HOLD rating and target price of Rs65. We think the management’s guidance toward attaining EBITDA-breakeven for the Zomato business by Q1FY24 would require careful calibration of employee expenses and marketing spends. We estimate EBITDA margin of -1.3% for FY24E. The 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 assign a HOLD rating on the stock given the uncertainties around integration of Blinkit (its quickcommerce vertical) and its impact on profitability.

* Hyperpure business could grow faster than expected. We have created a proprietary model to assess the total addressable market (TAM) size and revenue opportunity for the B2B e-commerce segment in India. TAM for the B2B e-commerce segment as of FY23E is ~US$25bn by our estimates and this is likely to grow very rapidly on the back of increasing digital penetration. Digital penetration in India B2B e-commerce is likely to reach ~1.2% by the end of FY23E compared to 13% (2019) in US (link). We believe B2B e-commerce is poised for a CAGR of ~55.8% over FY23-FY25E. Zomato’s Hyperpure business could benefit from this trend, especially given its existing commercial relationships with ~208k restaurants across the country and synergistic sourcing opportunities with Blinkit. (Link to our detail report)

* Underlying metrics of the food delivery business show steady improvement. We believe underlying metrics have improved. We estimate: 1) ordering frequency per user per month to have increased from 3.0 to 3.2; 2) delivery fees charged per order has increased from Rs22.43 to Rs24.76; and 3) take-rate from restaurants (exdelivery fees) has increased from 17.1% to 17.7% -- from Q3FY22 to Q1FY23. This, in our view, has resulted in the food delivery business’s contribution as a % of gross order value (GOV-reported) improving from 1.1% to 2.8% during the same period. Consequently, Zomato reported EBITDA breakeven in Q1FY23 for the food delivery business. While all of these are positive developments, we think the stock is likely to remain range-bound given the uncertainties around path to profitability for Blinkit.

* Risk: Reward still not compelling enough. The stock has corrected ~55% in the past 1 year, which has meant a significant derating. However, we note the stock is still trading at a premium to most of its global peers (~7x CY22E EV/Sales vs ~4.2x global average). We re-initiate with a HOLD rating on the stock given the uncertainties around integration of Blinkit (its quick-commerce vertical) and its impact on profitability. We arrive at a DCF based target price of Rs65 on the basis of WACC 12.5% and terminal growth 5% assumptions. At current valuations, we believe risk reward is evenly balanced (1.3:1).

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