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Zomato Limited is a leading food delivery aggregator in India and has presence in 23 other countries abroad. The company had revenues of nearly Rs. 1,994cr as of FY21.

* Driven by rapid increase in the number online gross order values of Indian food delivery, revenue jumped 140.4% YoY in Q2FY22.

* However, EBITDA loss widened to Rs. 536cr (vs. Rs. 122cr loss in Q2FY21) on higher opex. Adj. PAT also fell to Rs. 435cr loss (vs. Rs. 138cr loss in Q2FY21).

* The mainstay food ordering and delivery business is expected to drive shareholder value creation going forward. The management believes that the food delivery market in India is still nascent, and there is an opportunity to grow the market at least 10x over the next few years. Maintaining a positive outlook, we reiterate our BUY rating on the stock with a target price of Rs. 183 based on 23x FY23E P/Sales.

Setting new highs for online food delivery

In Q2FY22, as the COVID-19 situation improved significantly in India, overall revenue saw a stellar growth YoY basis to Rs. 1,024cr this quarter (vs. Rs. 426cr in Q2FY21) indicating the exponential growth in number of users ordering food online mainly driven by multiple lockdowns across the country. Overall customer traffic increased to 59mn average monthly active users (MAU) in Q2FY22 compared to 45mn in Q1FY22.

Net loss widens due to higher delivery costs and opex

Company has made heavy investments in the growth of food delivery business, including increased spending on branding and marketing for customer acquisition, higher investments and growing share in smaller and emerging geographies (which are less profitable compared to more mature cities) and increased delivery cost due to unpredictable weather and increase in fuel prices. Zomato’s delivery cost has increased by Rs.5 per order (as compared to Q1FY22), but the company does not expect the costs to go up further and feels confident about the margins staying positive in the mid-term, as well as long-term. Higher Employee Stock Ownership Plan (ESOP) expenses led to further loss of Rs.160cr to EBITDA this quarter. Total EBITDA ended at a loss of Rs. 536cr (against Rs. 377cr loss in Q1FY22). Adj. PAT also fell to Rs. 435cr loss (vs. Rs. 340cr loss in Q1FY22).

Key highlights in the quarter

The company will likely announce its divestment from Fitso, a sports discovery platform, in which it invested in 2021.The start-up has about a 10% stake in an online grocery delivery start-up Grofers that will give boost to the financial returns. Zomato has also decided to shut down all of its international businesses and has declared to shut down a D2C experiment in Nutraceuticals. The company is expected to announce investments in business discovery and rewards platform Magicpin, fitness start-up Curefit, and logistics aggregator ship rocket thereby expanding its portfolio.

Outlook & Valuation

While some of the factors are outside the control of the company i.e. prolonged monsoons, fuel prices, etc, other factors such as continuous investments in Next 500 towns and branding shall drive back-ended benefits in the upcoming quarters. The mainstay food ordering and delivery business is expected to drive shareholder value creation going forward. The management believes that the food delivery market in India is still nascent, and there is an opportunity to grow the market at least 10x over the next few years. Maintaining a positive outlook, we reiterate our BUY rating on the stock with a revised target price of Rs. 183 based on 23x FY23E P/Sales.

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