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Food delivery business stable & medium-term visibility strong

* Zomato delivered another strong quarter as 1QFY25 revenues of INR42.06b grew 18.1% [QoQ, ahead of our estimate of 6.9% QoQ growth. Growth was led by Hyperpure/Blinkit (up 27.4%/22.5% QoQ). Food delivery also performed well with revenue growth of +11.7% QoQ on the back of healthy order volume. Adj. EBITDA margin of 6.6% missed our estimate of 7.4%. PAT came in at INR2.5b (est. INR2.1b) vs. INR1.7b in 4QFY24.

* Food delivery is now stable, with steady GOV growth and predictable profitability: We believe Zomato’s food delivery business is now on a firm footing. GOV CAGR of 25% YoY would continue for the next 2-3 years, largely driven by increasing ordering frequency from its more mature cohort, as well as a steady conversion of its monthly “active” users to monthly transacting users. Its contribution margin of ~7.5% should improve only moderately from hereon. Its profit levers are now well balanced, but largely juiced out, whereas platform fees could eventually reach a ceiling in a pricesensitive market such as India, after all.

* Blinkit, however, notoriously defies any attempts to value the stock fairly, due to its feisty growth and the disruptive and evolving nature of quick commerce. Its gross order value (GOV) surged 100%+ YoY, and we believe Blinkit GOV is the most important factor driving variation for a DCF-based price target. With GOV growth assumed at 75% CAGR over FY24-FY28E, the target price is INR300 (Blinkit contribution INR171). If GOV growth moderates to 50%, the TP drops to INR180 (Blinkit contribution INR100, in this case). However, there may be upside risk to these GOV estimates, potentially unlocking more value. We expect adjusted EBITDA margin expansion could be slower, as the management continues to expand dark stores (2,000 dark stores by FY26 vs. ~600 dark stores currently).

* Zomato should report PAT margin of 4.0%/8.7% in FY25/FY26. Zomato’s food delivery business is stable, and Blinkit offers a generational opportunity to participate in the disruption of industries such as retail, grocery and ecommerce. Our DCF-based valuation of INR300 suggests a 25% upside from the current price. We reiterate our BUY rating on the stock.

Strong revenue beat driven by Blinkit

* Zomato reported 1QFY25 net revenue of INR42.06b (+18% QoQ/74% YoY), above our estimate of +6.9% QoQ. Excluding Blinkit, net revenue grew 17% QoQ /61% YoY.

* Consol. reported EBITDA came in at INR1,770m (4.2% reported EBITDA margin vs. 2.4% in 4Q), 120bp below our expectation. Adjusted EBITDA as % of GOV margin was up 90bp QoQ at 3.2%.

* Blinkit reported contribution margin of 4.0% (3.9% in 4Q). Adj EBITDA margin was -0.1% vs. our expectation of -0.2%.

* Food delivery revenue grew 12% QoQ/42% YoY, above MOFSLe of 2.0% QoQ.

* GOV (food) of INR92.6b grew 9.8% QoQ (est. 5.0% QoQ growth). Take rate expanded by 40bp QoQ to 21%.

* Contribution margin declined slightly to 7.3% (7.5% in 4Q).

* PAT was INR2.5b (est. INR2.1b) vs. INR1.7b in 4QFY24.

* YoY adj. revenue growth was steady at 62% and continued to trend above the stated outlook of 40%+.

Key highlights from the management commentary

* Food delivery business: Growth of 25% YoY is expected to continue. Margin has been expanding over time. In a few quarters, it will reach the range of 5% EBITDA. GOV growth is largely a function of order value growth with some contribution from AOV. The Gold Subscribers Program is largely mature.

* Blinkit: Sticking to the idea of delivery in 10 minutes and assortment efficiency. Modern retail stores cater to the premium end of customers. Capex is a combination of Blinkit store scale-up and increased warehousing capability. The company is taking upfront costs of capex and not from partners as Zomato is able to qualify capex.

* The dining-out business is now operating at a run rate of USD500m+ annualized GOV and is already profitable.

* The company has maintained the same philosophy for the use of cash: retaining cash and not looking for any M&A currently. There is big value in having a strong balance sheet and cash. There are no plans to distribute the cash.

Valuation and view

* Zomato's food delivery business is stable, and Blinkit offers a generational opportunity to participate in the disruption of industries such as retail, grocery and e-commerce. Our DCF-based valuation of INR300 suggests a 25% upside from the current price. We reiterate our BUY rating on the stock.

* We value the business using a DCF methodology, assuming 12.5% cost of capital. We maintain our BUY rating with a TP of INR300, implying 25% potential upside.

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