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Expect breakeven in FY25

The food delivery industry in India is all set to grow rapidly in the medium term driven by intensifying internet penetration, rising consumption and growth in urbanization. Zomato is a dominant player in the industry and we forecast the company to report 29% revenue CAGR over FY23-25. We expect strong growth to be complemented by the company turning profitable over FY25, despite elevated competitive intensity. We initiate our coverage on the stock with a BUY rating and a target price of INR70

Foodtech industry still in its early days; strong runway for growth ahead

* Growing internet penetration, rising consumption and urbanization have driven online delivery adoption in India. A large internet user base (1b by CY25E according to Redseer) combined with early stage of adoption – 9% of the population using internet (v/s 36% for China/50% for the US) – should ensure a long runway to growth.

* We expect India’s food delivery market to clock a rapid 19% CAGR over FY23-25 (v/s slowing growth in other markets) fueled by growth in the number of transacting users and order frequency. This should lead to a higher share of online food ordering (24% by FY25E from 13% in FY21).

Zomato to grow but duopoly to delay scale gains

* With the exit of Amazon, the food delivery market is now a settled duopoly with Zomato (55% market share) and Swiggy (45%). The market has a very high moat given the significant capital requirement to displace the incumbents.

* We expect Zomato to gain from the relatively early stage of food delivery ecosystem in India, as increased formalization along with growing share of platform led delivery (currently at 7% of overall food consumption) should help boost its Food delivery GOV to INR 384b in FY25 from 213b in FY22.

* We view the limited distinction between Zomato and Swiggy’s offerings – both having food delivery, dine-in and quick commerce – as a concern. A split market without a clear leader would hit margins due to absence of efficiency gains from order bunching. We see a contribution margin of 5.6% of GOV in FY25E for Zomato v/s its medium-term target of 8.0%.

Strong delivery across verticals to drive revenue growth

* We expect Zomato to report a strong 29% revenue CAGR over FY23–25 fueled by: a) higher penetration, b) higher proportion of transacting users, and c) increased ordering frequency.

* Food delivery AOV will remain flat in FY23E and increase to INR409 by FY25. Higher penetration and usage of Zomato should drive 13% CAGR in MTU over FY23-25, resulting in a 23% CAGR for the vertical during FY23-25 despite high-teens growth in FY24E amid near-term weakness.

* Revenue from Hyperpure (36% CAGR between FY23-25E) and Blinkit (27% CAGR between FY23-25E, adjusted for full FY23) is also likely to remain strong for the next few years as the company expands its operations.

All-set to breakeven over FY25E

* With Zomato’s food business recording EBITDA breakeven in 1QFY23, we expect the company to turn profitable over FY25. Continued spends due to elevated competitive intensity from Swiggy (unlisted) should weigh on Zomato’s operating costs in FY24, making it difficult to breakeven.

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