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Zomato posted another quarter of impressive execution, with growth across segments. Food delivery GOV grew 6.3% QoQ, but fell short of ours/ company’s own expectations given the muted demand environment. Food delivery contribution margin improved further to 7.1%, aided by ad-monetization and platform fee. Blinkit continued its stellar run with GOV growing 28% QoQ, coupled with further reduction in losses. Blinkit is on track to turn adjusted EBITDA breakeven on or before Q1FY25, according to the management. The company now expects consolidated adjusted revenue to grow at 50%+ YoY in the next few quarters, with Blinkit doing the heavy lifting. We increase our FY25-26E EPS by 1-2% factoring-in Q3 performance, and revenue mix change. With better clarity emerging on product-market fit and roadmap to profitability for Blinkit, we now value it at 1x FY26 GOV, compared to book value earlier. We retain BUY with a TP of Rs170 (earlier Rs140) on SOTP basis, valuing the food delivery business at Rs119/sh (DCF basis), Blinkit at Rs36/sh (1x FY26E GOV); and cash and other investments at Rs15/sh (book value).

Results Summary

Zomato reported revenue growth of 15.4% QoQ to Rs32.9bn, slightly ahead of our estimate of Rs32.2bn. All segments contributed to growth sequentially, with Food Delivery/Hyperpure/Quick Commerce/Going Out growing 10.2%/15.3%/27.5%/49%, respectively. Food Delivery GOV grew 6.3% QoQ, which was lower than the company’s expectations on account of the muted demand environment. Average monthly transacting users grew 2.2% QoQ to 18.8mn. Blinkit GOV grew 28% QoQ, aided by healthy demand during the festive season. Overall adjusted revenue grew 11.8% QoQ to Rs36.1bn. Contribution margin in food delivery improved to 7.1% from 6.6% in Q2, aided by better ad monetization and platform fee. Blinkit’s contribution margin improved to 2.4% from 1.3% in Q2. Adj. EBITDAM as % of GOV increased to 3% for food delivery (vs. 2.6% QoQ) and -2.5% for Blinkit (vs. -4.5% QoQ). Overall, adjusted EBITDA margin improved to 3.5%, compared to 1.3% in Q2. What we liked: Strong growth and execution in Blinkit, healthy OCF in 9MFY24. What we did not like: Muted consumer demand leading to lower-than-expected food delivery GOV growth.

Earnings Call KTAs

i) Company expects overall adjusted revenue to grow over 50% in the next few quarters and remains confident of growing overall adjusted revenue by 40%+ in the medium term. ii) It expects food delivery GOV to continue growing 20%+ YoY, and accelerate further with market share gains and revival of consumer demand. iii) Food delivery take rate (revenue as a % of GOV) inched up 70bps QoQ, aided by increase in platform fees, advertisement revenue, and commissions. iv) Management highlighted that focus remains on better conversion of ATU to MTU and adding new customers. v) Management suggested that company usually opens a new dark store in the same neighborhood, when utilization of the existing store reaches ~50-60%. vi) Fixed costs for food delivery increased sequentially due to higher seasonal marketing spends (world cup, festivals), and investments in server and tech infrastructure. vii) Blinkit's sequential GOV was driven by an uptick in demand due to festivals, right assortment mix, and high-service levels via minimal stockouts, and adequate availability of delivery partners. viii) Despite the company adding 40 net-new dark stores (up ~10% QoQ), avg. GOV per-day, per-store grew 17% QoQ, reflecting healthy SSG. ix) In Q3, 70% of dark stores were contribution positive (60% in Q2) and ~20% were operating at a 5%+ contribution margin, creating room for investing in new stores, while also continuing to improve aggregate contribution margin. x) Company is setting up a plant for processing value-added food supplies, including sauces, spreads, pre-cut, and semi-finished perishable products among others. It does not expect any significant capex and suggested an attractive payback for the same.

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