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Strong comeback

Zomato reported significant sequential improvement in all key operating and financial metrics in 4QFY22. What was even more impressive were the disclosures and management willingness to address street concerns both through a shareholders letter as well as post results conf. call. With a dual focus on growth and profitability, management guided for sequential top line growth to accelerate to double digits in 1QFY23 (despite supply side challenges in some cities) while Adj. EBITDA losses are also expected to decline meaningfully. Company mentioned that it was contribution profit positive in 120 cities in FY22 (out of its top 300 cities versus just 5 in FY20) while indicating that group contribution profits could inch towards double-digits in the long term. While we expect Zomato to sustain high-growth momentum in the near term, we moderate our GOV/Revenue estimates over FY23-25E due to growing company focus on profitability and concerns on impact of inflation on demand. Profitability on the other hand should continue to improve due to strong operating leverage. We raise our WACC to 13% from 12% earlier due to rising yields and market volatility, leading to a revised DCF-based TP of INR 115 (versus INR 140 earlier).

Strong beat: Zomato reported an all-round beat on all key operating/financial metrics in 4Q. While GOV (+6% QoQ) and reported revenue (+9% QoQ) were ahead of JMFe by ~7% each, contribution margin at +1.7% (+60bps QoQ) was 80bps ahead of JMFe. Adjusted EBITDA loss % was also lower than our forecast at -18.5% (versus JMFe of - 24.4%) due to better than expected contribution margins and operating leverage. Similarly, EBITDA loss % was -37.1% (-44.0% in 3Q) lower than JMFe of -43.5%, while adjusted net loss was INR 3.5bn versus our loss estimate of INR 3.9bn.

Repeat customers driving demand: New customer additions remained strong in 4Q with ~5.5mn new additions (similar to 3Q) despite reduced marketing spends (-14% QoQ). However, management mentioned that >90% of its food delivery business is being driven by repeat users compared to new users. While it used to spend on acquiring new customers as well as driving repeat order behavior till a few years back, need for such subsidies has signficantly reduced now. Company expects growth in the near term to be driven by repeat customers as there is substantial room for improvement in average annual ordering frequency (which is ~10 per user per year). Neverthless, company continue to expand operations from long term perspective as it added 300+ new cities in 4Q (it now operates in 1,000+ cities across India). Contribution to GOV from new cities was 0.2% in 4Q, with top 8 cities contributing ~60% and top 300 accounting for ~99%.

Zomato - a long-term growth story, reiterate BUY: We remain bullish on Zomato’s longterm growth prospects in the hyper local delivery space as it is well positioned to benefit from robust industry tailwinds such as improving tech penetration and rising income share of digitally native millennials / GenZ. We also retain a positive view on the company’s other hyper local ecosystem investments (i.e. beyond core food delivery) as they could lead to bundled offerings that would not only help it improve customer engagement, retention and ordering frequency but also drive operational synergies.

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