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Treading the Info Edge path

Zomato’s Q2FY22 revenue growth was incredibly strong (+21% QoQ & 140% YoY) and way higher than our expectations (+10% QoQ). Delivery fee (+25% QoQ) outgrew GOV (+19% QoQ) by a margin, hinting at a meaningful increase in delivery charges, as we anticipated in our initiation note. Operationally, both supply (#restaurants: +15% QoQ) and demand side (MAUs: +31% QoQ; MTUs: +26% QoQ) metrics reported an impressive increase. This strength seems to be driven by opportunistic branding and marketing investments (+Rs0.4bn vs Q1FY22) focused on driving the return of customer traffic post the 2nd covid wave. Besides this, (1) increase in delivery cost (Rs5 / order or Rs0.73bn, vs Q1FY22), (2) growing share of cities outside top-20 and (3) higher ESOP expenses (+Rs0.2bn, vs Q1FY22 and +Rs0.7bn vs our FY22 run-rate estimate) led to Rs 1.6bn higher EBITDA loss vs the previous quarter. While some of these factors are outside the control of the company (e.g. prolonged monsoons), other factors (e.g. aggressive investments in Next 500 towns and branding) should drive back-ended benefits, in our view.

What caught our attention in the MD&A are (1) ambition of creating a US$10bn revenue business (vs US$266mn revenue in FY21) in a ‘few years’ time and (2) Alibaba / Tencent / Info Edge like aspiration of taking the investment route to build the hyperlocal e-commerce ecosystem. While this is easier said than done, resisting the temptation of venturing into unrelated businesses is the key to long term shareholder value creation, in our view. As part of its planned shopping spree, Zomato announced acquisition of (1) 6.4% stake in Curefit for US$100mn consideration (US$50mn cash + Fitso sale), (2) 8% stake in Shiprocket for US$75mn and (3) 16% stake in Magicpin for US$50mn. The alignment of these three entities with the strategic priorities of Zomato and the synergy potential needs to be seen. Zomato plans to deploy another US$1bn from the IPO proceeds over the next 1-2 years

On the back of strong demand tailwinds covered in depth in our food-tech thematic – and IC, we expect 46% / 33% revenue CAGR over next 5 / 10 years. As growth / PAT margins are yet to reach steady state, PEG is better vs P/E for relative comparisons, in our view. At 0.5x FY24E PEG, Zomato is way cheaper vs median food services (1.9x), technology (1.8x) or consumer (2.9x) stocks. We value it at 55x FY25E P/E, in-line with median consumer discretionary multiple. Upside risk to our estimates and target multiple is likely as discounts turn out to be lower vs our base case and the company scales up in attractive adjacencies.

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