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Addressing top investor concerns

Zomato's stock price has corrected ~40% CYTD. While this can be partly attributed to global factors (rising interest yields, the Ukraine crisis, etc.) and the company's reluctance to host analyst/investor interactions (while selectively sharing data/comments on Twitter), an equal, if not greater, contributory factor is investor concerns related to the operating business. In this note, we try to address some of these apprehensions by triangulating a few facts, data points, and educated assumptions. We also reiterate our bullish long-term view on the fooddelivery opportunity/Zomato built on the premise that the company will benefit from increasing tech penetration and rising income share of digitally native millennials / GenZ. While our estimates remain unchanged, given the volatile market conditions we revise our valuation approach to DCF instead of EV/Net Sales, leading to a revised TP of INR 140 (Upside +75% from CMP) versus INR 155 earlier

Can food-techs deliver 3.5x-4x growth over the underlying food services market? According to Redseer estimates, India's food services market size was INR 4.6trn (USD 65bn) in CY19, and the organised segment had 37% market share. While Redseer forecasts the overall market revenue to report a CAGR of 9% over the next 5 years, it expects the organised segment to grow by 14-15% per annum. We expect Zomato to deliver ~36% GOV growth (~4x of total food services) during this period because (i) postCovid, organised restaurants’ order share from the delivery channel has increased and is likely to stay significantly above pre-Covid levels (Exhibit 8); (ii) NRAI restaurants data suggests significant untapped opportunity (Exhibit 9); (iii) we expect restaurants with inhouse delivery fleets to pass on their direct channel orders to food-techs due to cost efficiencies; (iv) we expect incremental orders from the broadly untouched unorganised segment as food-techs are building on-boarding mechanisms for such outlets (media report); (v) cloud kitchens market, which is completely delivery dependent, is expected to grow from USD 0.4bn in CY19 to USD 2.0-2.8bn by CY25 (a CAGR of 29-36%); and (vi) we expect densification and changing user habits to lead to incremental order volumes per MTU.

Broadly, our assumptions factor in 14-15% delivery penetration by CY25 versus 6-7% in CY19 (context-wise, penetration in China as of CY21 is ~20%).

Are we overestimating MTUs based on industry reports that indicate a sharp rise in product shoppers? Our back-of-the-envelope calculations suggest that Zomato would have recorded ~50mn annual transacting users in CY21, almost half of them new users; this would have dragged down the MTUs in the recent period (~15.5mn in 2Q-3QFY22) due to lower repeat order frequency. On the other hand, the same data also indicates sufficient room for MTUs to increase driven by user maturity on the platform. Alternatively, India will have ~110mn households in CY25 with annual income of over USD 7,700 (~INR 550,000), an overwhelming majority (80-85%) of which would likely be urban. Further, given the increase in nuclear families and the number of women joining the workforce in urban regions, we see a minimum target opportunity size of 175-190mn individuals in CY25, assuming a maximum of 2 adults per family. We also triangulate this based on the age-wise distribution of population, which indicates there are ~700mn individuals in the 15-44 years age bracket. Assuming only 35% of these individuals (in line with urbanisation data) reside in cities and only 60% of them are willing enough to order from platforms, there could be ~150mn individuals ordering at least once in a year by CY25

Taking all the above factors into consideration, we believe our MTU estimate of 45mn MTUs in FY26 is a reasonable assumption (context-wise, Meituan, the largest food-tech in China, has ~400mn annual transacting users as of CY21).

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