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Our weekly update returns in a new avatar. Zomato is the ‘Idea of the Month’; investor worries about competition and profitability for Blinkit are overdone. The markets remain under pressure but the RBI is taking strong pro-growth measures – the Nifty looks attractive below 22,500 on valuations. Stability in earnings forecasts is key. Read on

Zomato

Quick commerce is a bigger opportunity than modern retail or e-commerce, as it is disrupting general trade. Like other digital businesses, the existing 2-3 leaders should dominate after an initial period of intense competition. Blinkit has an additional moat due to the complexity of the quick commerce fulfillment model.

The low and declining profitability is not a cause for worry. This is an inherent feature of internet businesses – high losses in the initial land-grab phase followed by OpLev-led profitability as the business matures. Blinkit’s topline growth and market share are the important metrics, at this stage. Losses could continue for a few more quarters. An upside surprise could be profit-positive interventions by Zepto ahead of its IPO, when it happens.

Zomato's 17% YoY GOV growth in food delivery for 3QFY25 was underwhelming, but appears to be a one-off from the excess seasonal pressures and the general slowdown in consumer spending. Our macro view is that discretionary consumption will recover in FY26, so this should be a passing phase.

Zomato trades at 7x EV/sales (FY26) and is undervalued compared with peers. We give it credit for its track record of innovation and execution – the management spotted the q-commerce opportunity when few others did. It also fits into two macro themes: the expected rebound in discretionary consumption in 2HCY25, and the greater value capture by digital disruptors in consumer businesses (detailed investment argument on Page 2).

Market update

The brutal correction in the market continues, with renewed FPI selling. This kind of price damage creates its own negativity but there are positive signs. The RBI’s move to reduce risk weights for NBFCs and micro-borrowers is a big positive. This should enable banks and NBFCs to lend more aggressively in retail segments, which would in turn aid the recovery in consumption. Also, the correction has de-frothed valuations, and the Nifty is attractively valued at below 22.5k (19.2x 1YF P/E). Financials is the best trade on the RBI easing, but we see this as an opportunity to lighten positions as valuations are still out of sync with medium-term growth. Our preferred sectors are Consumer Discretionary, Healthcare, and Telecom.

Read of the week – Taylor Swift!

This HBR analysis of Taylor Swift by Kevin Evers (link, partial paywall) struck a chord at many levels. Evers’s framework of her success can be extended to businesses too. The last two behaviors, in my opinion, also reflect scenarios where most businesses falter and end up conceding leadership: maintaining productive paranoia and adapting to platform shifts. We see this in the two sectors we are structurally UW on – ie banking and staples. Companies shifted focus to productivity and profitability, neglecting innovation and creativity, and are now struggling to adapt to a new post-digital world with more democratized access to consumers.

Midweek Masala – New avatar

Our relaunched weekly has a new format. We will cycle through four themes every week – Idea of the Month (this week), Market HealthCheck, Stock Screeners, and Macrometer. We return to each theme every four weeks. We shall also be highlighting interesting reads and a market update, when necessary. We also have a section on the week’s movers and shakers on the inside pages. We will be publishing every Wednesday, and the data will capture the Wed-Tue cycle.

Idea of the Month – Zomato

* Zomato is covered by Dipeshkumar Mehta; read his last few notes 

* Existing players have scratched the surface of the addressable market for quick commerce. Modern retail formats, including e-commerce, have not materially impacted the traditional corner store ecosystem (general trade) till now. Quick commerce disrupts this segment, making it a much bigger opportunity.

* There will be a period of intense competition, but we believe that this will be a oligopolistic 2-3 player market, and the challengers will fade away. This is the nature of most digital markets because customer behavior generally pans out in such manner. Blinkit has the additional moat of its quick commerce template being a complicated fulfilment model, which even existing e-commerce players will struggle to match. There may be some short-term noise, but Blinkit will ultimately emerge as a dominant player.

* The model of land-grab in the initial years, followed by Op-Lev lead profitability in the maturity stage, is now a proven model for digital businesses. We are not worried about Zomato being surprising negatively on profitability, especially given its strong topline growth. An interesting sidelight of 3QFY25 earnings is that Dipesh’s earnings forecasts were cut dramatically (58%/83% for FY25E/FY26E) but revenue forecasts were raised by 0.2%/5.2%. A digital business that is incurring higher losses for faster growth in the early stages of a buildout is not a problem at all.

* Admittedly, this profitability may remain under pressure for a few more quarters, as competitive intensity remains high. This period will pass, though. We also think that Zepto’s upcoming IPO, when it happens, will be a positive trigger as the company will need to take profit-positive interventions (higher fees or lower discounts) to push the offer through.

* Zomato’s 17% YoY growth in food delivery (3QFY25, GOV and adjusted revenue) was underwhelming. This looks like a one-off – a seasonally weak quarter compounded by a general slump in consumer spending. We expect growth to recover in coming quarters as consumer sentiment recovers and the seasonality wanes. This, however, is a key monitorable as it would negatively impact valuations if growth does not recover.

* Originality of thinking and courage to pursue moonshots are critical parameters for evaluating digital companies. Zomato scores on both counts – the vision to see the qcom opportunity when it bought Grofers in 2022 was a standout call. This is backed by strong execution – setting up dark stores and the logistics network requires strong capabilities in the offline world.

* We prefer EV/sales valuations for internet companies, and Zomato is cheap compared with the peer-set (Exhibit 3). We think the market underestimates the size of the qcommerce opportunity (or is excessively worried about the competition). We take additional comfort from the cash/Mcap ratio of 9.2% – the Blinkit cash-burn can be comfortably absorbed with the existing balance sheet.

* Zomato also fits into two macro themes. First, discretionary consumption should bounce back in 2HCY25, and this affects the food delivery business positively. Second, digital disrupters will capture greater value in consumer businesses than traditional incumbents.

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