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Zooming to new highs but value unlocking far from complete

To say that Zomato’s 1QFY24 results were ‘stellar’ would be a gross understatement. While we strongly believed that the Street estimates were depressed, the quantum of the beat was just unfathomable. Take this: the company delivered adj. EBITDA of INR 1.81bn in Food Delivery (FD) in Jun-Q versus INR 0.78bn in Mar-Q, a c.49% beat on JMFe that was likely amongst the highest on the Street. This was despite ‘muted’ GOV growth of +14% YoY (+11% QoQ) and ‘Gold’ membership weighing on contribution margin expansion. While Blinkit’s GOV growth was muted at c.5% QoQ (well below JMFe of 15% QoQ) owing to supply side disruptions, adj. EBITDA loss narrowed to INR 1.33bn from INR 2.03bn in Mar-Q, another strong beat on JMFe loss of 1.68bn. More importantly, the business has turned contribution positive as of Jun’23 and is now likely to turn adj. EBITDA break-even by 1QFY25. These factors primarily led to the company achieving Consol. adj. EBITDA and reported PAT break-even three quarters earlier than what the management had guided. As if that was not enough, the management has guided for 40%+ adj. revenue growth over FY24 and FY25 at a consol. level. Baking in the results and the guidance, even with a decent margin of safety, suggests Zomato is a rare play on both growth as well as profitability. While the stock has moved up ~35% since Mar-Q results, we expect the momentum to sustain, as at CMP, the market is largely capturing value attributable to only its FD business, whereas significant value unlocking is waiting to happen in Blinkit. We reiterate Zomato as the top pick within our listed Internet coverage with a revised TP of INR 115 (vs. INR 105 earlier).

* FD growth ahead of guidance, YoY trends to improve hereon: FD GOV grew 11% QoQ (+14% YoY) to INR 73.2bn, a beat on JMFe of +8% QoQ and the management’s guidance of high single digit (sequential) growth. We estimate order volumes grew c.10% QoQ, aided by MTU’s recovering to 17.5mn from 17.4m/16.6mn in 3Q/4Q FY23, while ordering frequency also would have improved. Growth was driven by 1) continued demand recovery (that started in Feb’23), 2) seasonality, and 3) ‘Gold’ adoption (the programme contributed 30%+ to GOV) and 4) better supply side execution. The management believes muted YoY growth trends in FD have now likely bottomed out. We now forecast FD GOV growth of 17% YoY in FY24 versus 13% earlier, primarily led by MTU as well as order frequency improvement.

* Significant room for margin improvement in FD despite accelerated profitability trends: Adj. EBITDA margin as % of GOV of 2.5% was well ahead of 1.2% in Mar-Q and JMFe of 1.7%. Key factors contributing to the expansion included 1) take-rates reporting 100bps QoQ improvement and offseting the adverse impact of Gold. This led to contribution margin of 6.4% versus 5.8% in Mar-Q (JMFe was 6.2%) and 2) strong operating leverage (fixed cost was down 6% QoQ due to benefits of cost rationalisation in 3Q while GOV expanded 11% QoQ). GOV growth guidance and reiteration of adj. EBITDA margin expectations of 4-5% suggests strong sequential operating profit growth in FD should continue in the near term. We now forecast adj. EBITDA margin to improve to 3.2%/4.5%, respectively in FY24/25 that could lead to ~INR 10bn/INR 17bn of EBITDA.

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