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* Zomato delivered an excellent 1QFY24 performance, as it turned profitable and reported strong revenues of INR24.1b (up 17.5% QoQ), much ahead of our estimates of 9.9% QoQ growth and a PAT loss. Revenue growth was led by the food delivery business (up 17% QoQ). While Blinkit was muted (+5% QoQ) due to disruptions in April-May, it should reverse in 2Q (20% QoQ growth guidance). The management has guided for strong 40%/60%+ growth for Zomato (consol)/Blinkit over the next few years, which surprised us on the upside.

* Zomato’s 1QFY24 Adj. EBITDA margin at 2.2% was significantly ahead of our estimate (-3.1%) on account of a higher take rate and lower operating costs. This helped the company brake-even on PAT (INR20m), ahead of its 4QFY24 guidance. The management expects the company to sustain profitability as it moves toward food delivery adj EBITDA margin of 4-5% of GOV eventually, along with accelerated break-even in Blinkit over the next four quarters.

* We see the strong all-round performance from Zomato as an indicator of an accommodative competitive environment in both food delivery and quick commerce verticals. Moreover, the sharp 80bp QoQ increase in take rate in food delivery highlights its success in cross-selling ads to restaurants, which is a more sustainable revenue stream rather than depending on increase in take rate. We expect Zomato to deliver 25%/107% revenue CAGR in food delivery/quick commerce verticals over FY23-25, helping it grow its consol adj revenue by 43% over the same period.

* Strong revenue growth should drive significant margin leverage, given the fact that competitive pressure in quick commerce has eased considerably over the last few months due to a funding crunch for smaller peers. We now estimate Zomato to turn positive on reported EBITDA by 4QFY24 and deliver c5% EBITDA margin in FY25 (vs. our earlier estimate of break-even in FY25). As a result, Zomato should report PAT of INR1.3/INR8.3b in FY24/FY25.

* We remain positive on the long-term growth opportunity for Zomato and do not expect competition to intensify further despite the entry of ONDC in the space. Our DCF-based valuation of INR110 suggests a 27% upside from the current price. We reiterate our BUY rating on the stock.

Strong revenue beat and guidance; achieves breakeven ahead of guidance 

* Zomato reported 1QFY24 net revenue of INR24.1b (+17.5% QoQ), a strong beat to our estimate of INR22.6b (+9.9% QoQ). Excluding Blinkit, net revenue grew 20% QoQ /44% YoY.

* Zomato turned positive on PAT level ahead of its guidance of 4QFY24. EBITDA loss narrowed sharply to INR480m (-2% EBITDA margin vs. -11% in 4Q), ahead of our estimate of EBITDA loss of INR1.8b, aided by operating leverage.

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