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Another quarter of strong beat; Blinkit continues to surprise

Medium-term visibility remains strong; reiterate BUY

* Zomato delivered another good quarter, with 2QFY24 revenue growth of 18% QoQ (INR28.5b) beating our estimates of 11% growth. Growth was led by Blinkit, up 31.5% QoQ. The food delivery business also outperformed, with revenue growth of +12.7% QoQ on the back of strong order volume.

* Adj. EBITDA margin at 3.0% missed our estimate of 3.6%, partly due to lower profitability in Gold customer orders (40% of total GOV). The management expects further expansion in margins, as the gap between Gold and nonGold customers narrows with scale, helping it move toward food delivery adj. EBITDA margin of 4-5% of GOV. Zomato continues to expect a breakeven in Blinkit in 1QFY25 despite maintaining a high pace of new store addition.

* The performance of food delivery and quick commerce businesses was promising. With the company expecting strong growth for both Blinkit and food delivery in 3QFY24, we expect Zomato to deliver a strong 65% YoY growth in FY24. Zomato should deliver a revenue CAGR of 32%/116% in food delivery/quick commerce verticals over FY23-25, helping it grow its consolidated adj. revenue by 53% over the same period.

* The company was successful in increasing its take rate by a sharp 70bp QoQ in food delivery with the introduction of platform fee and continued traction in ad monetization. While we expect the pace of the take rate increase to start moderating now, advertisements remain a potential driver of further upside on take rate and profitability of the business.

* Blinkit’s contribution margin turned positive in 2Q on the back of strong growth. Strong revenue growth should drive significant margin leverage, given the fact that competitive pressure in quick commerce has eased considerably over the last few quarters due to a funding crunch for smaller peers. We now estimate Zomato to turn positive on reported EBITDA by 3QFY24 (earlier 4QFY24) and deliver 4.1% EBITDA margin in FY25. As a result, Zomato should report PAT of INR2.4b/INR8.8b in FY24/FY25.

* We remain positive about the long-term growth opportunity for Zomato and do not expect competition to intensify further despite the entry of ONDC in the space. Our DCF-based valuation of INR135 suggests a 16% upside from the current price. We reiterate our BUY rating on the stock.

Good topline performance; margin in-line

* Zomato reported 2QFY24 net revenue of INR28.5b (+17.9% QoQ/71% YoY), above our estimate of +11% QoQ. Excluding Blinkit, net revenue grew 15% QoQ/54% YoY.

* Consolidated reported operating loss was stable at INR470m with -1.7% EBITDA margin (vs. -2.0% in 1Q and our expectation of -0.5%). Adjusted EBITDA margin was up 80bp QoQ to 3.0% (est. 3.6%).

* Blinkit broke even on contribution margin in 2Q, reporting a contribution margin of 1.3% (-0.7% in 1Q).

* Food delivery revenue (excluding delivery charges) grew 12.7% QoQ/36% YoY, (est. 3.0% QoQ) on strong demand, Gold contribution and Cricket World Cup impact, despite adverse seasonality. GOV (food) of INR79.8b grew 9.0% QoQ (est. 3.6% QoQ). Monthly transacting users grew 5% QoQ. Contribution margin improved to 6.6% (6.4% in 1Q), helped by a higher take rate (19.4%, +70bp QoQ).

* Hyperpure revenue grew 21% QoQ in 2QFY24.

* Blinkit 2Q GOV was up 29% QoQ (low 1Q base due to store closures). Strong improvements in both orders and AOV in 2Q.

* PAT at INR360m (est. flat PAT) vs. INR20m in 1QFY24; net cash at INR118b.

Key highlights from the management commentary

* The management suggested that a majority of the long-term growth will be driven by an increase in Monthly Transacting Customers (MTCs).

* Though ESOP costs increased during the quarter, the management maintained the guidance of INR4.5b of ESOP costs for FY24.

* For Blinkit, the management is confident of strong growth in 3QFY24 and suggests that the growth should be similar to current quarter.

Valuation and view

* The food delivery business is still in a nascent stage in India with a long runway for growth. With a dominant market share and strong growth in the food delivery business and Hyperpure, we expect Zomato to report a strong 53% adj. revenue CAGR over FY23-25.

* We now estimate Zomato to turn positive on reported EBITDA by 3QFY24 (earlier 4QFY24) and deliver 4.1% EBITDA margin in FY25.

* We value the business using a DCF methodology, assuming 4% terminal growth rate and 12.5% cost of capital. We maintain our BUY rating with a TP of INR135, implying 16% potential upside.

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