Q1FY24 Review: Zomato: Sprinting on the path to profitability!

4 Aug 2023 , 12:31 PM

Zomato’s Q1FY24 Adj. revenue grew 15.4% QoQ/54% YoY. Food delivery GOV grew by 11.4% QoQ on recovery in demand, seasonality, higher order frequency and solid execution. Blinkit growth moderated with GOV/revenue growing 5%/6% QoQ, on temporary business disruption due to change in delivery partner payout structure. Food delivery Contribution margin increased to 6.4% of GOV (+60bps QoQ). Zomato delivered the first quarter of Adj. Ebitda profitability, 3 quarters ahead of the previous guidance. Management is now targeting Blinkit Adj. Ebitda breakeven in the next four quarters and reiterated its aspiration of margins of ~4- 5% of GOV for its Food delivery business over the medium term. Analysts of IIFL Capital Services believe the ahead of expectations delivery of profitability highlights the superior execution by Zomato and now expect FY24 to be first year of Adj. Ebitda profitability and FY25 to be the first year of PAT profitability. Analysts of IIFL Capital Services maintain their BUY rating but raise their DCF-based 12-mth TP to Rs100 (was Rs80) on roll forward and faster path to profitability, implying 16% potential upside. 

Food delivery bounces back, growth sustainable: 

Adj. revenues rose 15.4% QoQ to Rs27.9bn (+54% YoY), as Food delivery reported strong sequential growth. Hyperpure accelerated further, growing 29% QoQ (+126% YoY), while Blinkit growth moderated to 5% QoQ, on temporary business disruption. Zomato believes it can delivery 60%+ YoY GOV growth in Blinkit given the nascent stage of the business and 40%+ YoY Adj. revenue growth for its overall business at least for the next couple of years. 

Ahead of time profitability highlights superior execution: 

Zomato reported Adj. Ebitda (ex-ESOP) margin of 1.9% (vs -5.8% in Q4), turning Adj. Ebitda profitable 3 quarters ahead of its guidance. Management expects the profitability to increase further going forward and is now targeting Adj. Ebitda profitability in Blinkit in the next 4 quarters. 

Quicker path to profitability can result in further re-rating: 

Analysts of IIFL Capital Services believe that the sooner-than-expected profitability can lead to further rerating in the stock and they now expect FY24 to be the first full year of Adj. Ebitda profitability for Zomato. Their TP increases to Rs100, implying 5.5X/4.3X on FY25/26 EV/Sales. Stock is trading at 4.7X FY25 EV/Sales, offering 33% revenue Cagr over FY23-26. Key risks: regulations, M&A.