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A delicacy that can wait

Zomato is the leader in India’s nascent online food delivery business with a massive growth playfield. The stock’s current price though factors in runaway growth, making it no less than a delicacy. Beating such lofty expectations calls for a structural uptick in its key drivers.

Adjacencies – side orders – can however add palpable flavour (value) over medium-to-long term considering Zomato’s deep engagement and compelling market power. The company boasts a superior growth profile and quality vis-a-vis global peers, but at 24.3x FY22E EV/sales, the stock’s indeed expensive. On balance, we are initiating Zomato at ‘HOLD’ with a TP of INR151. Key risks: regulations around gig workers, quality of disclosures and execution vis-a-vis archrival Swiggy.

Food delivery business can scale up

Dishing out customer convenience, online food delivery apps have gained scale across the globe. After food delivery apps’ 140% CAGR over 2016–19 and a pandemic-led blip in 2020, we expect them to deliver a 22% CAGR over 2019–30. This would catapult the industry size to USD35bn, or 16.2% of total by 2030, from 4.2% currently, even topping current penetration in mature markets such as the US (6%), South Asia (10.2%) and China (15.6%). As a pointer, e-commerce with a fiveyear head start over online food delivery, is logging similar growth rates. Such growth is indeed achievable, but sustaining it would require acceleration of GDP growth, urbanisation trends, female workforce participation, etc.

Adjacencies can create value—not grocery, maybe cloud kitchen

We believe shelving the grocery business is a good strategic move by Zomato as supply chains of food delivery platforms complement only those for instant grocery—a small, less profitable segment of the overall grocery market. We do see opportunities in adjacencies though: cloud kitchen, table booking, advertisements restaurant supplies, etc. While Zomato is committed to staying away from cloud kitchens, it can exploit consumer insights to create better products and capture a higher share of the value chain, a la private labels in e-commerce.

Outlook and valuation: Strong growth priced in; initiate with ‘HOLD’

We estimate Zomato would clock a lip-smacking 50.6% revenue CAGR over FY21–25, riding a 46.1% CAGR in delivery volumes. As it focuses on gaining scale and market share, we estimate contribution profit/ order would drop to INR7.6 in FY22 (INR20.5 in FY21) and increase to INR16.6 by FY25. Zomato would turn in positive cash EBITDA by FY24E, but would report positive EBITDA in FY26 due to high ESOP costs.

The stock is trading at 16.7x FY23E EV/sales, a significant premium to global peers due to its superior growth rates and long growth runway. We arrive at a TP of INR151, wherein we value core food delivery at INR140 using DCF and optionality for adjacencies at INR12. We are initiating coverage with a ‘HOLD’ recommendation and ‘Sector Neutral’ rating along with a TP of INR151. Regulatory risks, execution vis-àvis versus Swiggy, and quality of disclosures are the key risks to our call.

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