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ESOP charges play spoilsport

Food delivery segment: Mild surprise in growth

Zomato’s (ZOMATO IN) food business continued to report strong growth, ahead of industry averages. GOV/revenue grew 22.5% YoY/40.3% YoY in FY24. Expect momentum to continue with GOV/revenue CAGR of 18%/21% in FY24-26E, led by drivers such as: 1) increased frequency, 2) user growth, 3) ad revenue, and 4) higher platform fee. The management largely maintained its guidance of adjusted EBITDA breaching 4-5% near term, which per our assessment could move to 4.4% in FY26E. But based on higher ESOP inclusion, we cut FY26E EBITDA estimates for the food delivery segment 10% – ESOP charges may continue even beyond FY25 and may remain high (~INR 6bn in FY25E), versus our expectations of a sharp cut in ESOP expenses. This in turn may hit food delivery valuation by 10% (contribution to consolidated EV down to 46% from 58%).

Blinkit turns bigger

Blinkit’s GOV/revenue surged 93.3% YoY/116.4% YoY in FY24, as user-led growth was at 72.9% YoY. Further, take rates improved 200bps YoY to 18.5%, led by: 1) a change in product mix, 2) ad revenue, and 3) delivery charges. ZOMATO has guided to double its store count to >1,000 by endFY25, which alone may drive potential GOV growth of 65% YoY in FY25E. Also, increased penetration in select cities (Hyderabad, Bengaluru, Kolkata, and Mumbai) and growth in existing cities may lead to systemwide GOV growth of 190% YoY for Blinkit in FY25E. Despite Blinkit operating at a larger scale, ZOMATO expects adjusted EBITDA, as a percentage of GOV, to be at break-even, near term, which potentially may move up to 4-5% on steady state over the medium term, similar to the food business. The aforesaid factors may have a big positive impact on Blinkit’s valuation, which could move up 60% to INR 940bn (42% contribution to consolidated EV), per our assessment. We trim our EV/sales multiple for Blinkit to 5.5x (8x earlier), due to low near-term visibility on profitability. Improved profitability of Blinkit coupled with market share gain (moving towards <50%) may aid future upgrades.

Valuations: Maintain Buy with a higher TP of INR 280

We continue to favor ZOMATO on 1) its strong moat in the food business, which may continue to post an adjusted EBITDA CAGR of 47% in FY24-26E, and 2) superior execution for Blinkit (market leadership), helped by better customer experience versus peers (on-time delivery, better product assortments). We up our consolidated revenue estimates by 22%/33% for FY25E/26E, led by better growth for Blinkit/Hyperpure. But our FY25E/26E consolidated earnings upgrade is mere 7%/3%, on higher ESOP charges and lower EBITDA for Blinkit (latter’s focus is expansion). Maintain BUY with a higher Sep ’25E SoTP-TP of INR 280 (from INR 250).

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