Q2FY24 Review: Zomato: Before time delivery on food and profitability!

6 Nov 2023 , 03:00 PM

Zomato’s Q2FY24 Adj. revenue grew 16% QoQ/53% YoY. Food delivery GOV grew by 9% QoQ, driven by an increase in order volume, adoption of the Gold program and better execution. Blinkit growth bounced back with GOV/revenue growing 29%/32% QoQ, on a low base and same store sales growth. Food delivery Contribution margin expanded further to 6.6% of GOV (+20bps QoQ) on introduction of platform fee and higher ad revenues; and Blinkit turned Contribution positive for the first time. Management continues to target Blinkit Adj. Ebitda breakeven by Q1FY25 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 consistent delivery on both growth and profitability highlights the superior execution by Zomato and they now expect FY24 to be first year of reported profits, in line with management guidance. Analysts of IIFL Capital Services raise their DCF-based 12-mth TP to Rs120 (was Rs100) on roll forward and faster profitability as they now build ~Rs20bn PAT by FY26. Recent rally leaves limited upside but analysts of IIFL Capital Services recommend buy on corrections. 

Broad based growth across segments: 

Adj. revenues rose 16% QoQ to Rs32.3bn (+53% YoY), on broad based growth across segments. Food delivery grew 11% QoQ, Hyperpure 21% QoQ and Blinkit growth rebounded to 32% QoQ, on a weak base. Zomato expects Food delivery GOV to grow 25-30% YoY in Q3 and reiterated that it remains on track to grow the overall Adj. revenues by 40%+ over the next couple of years with Quick Commerce growing at a faster pace. 

Blinkit turns contribution positive, on track for Adj. Ebitda breakeven by Q1FY25: 

Zomato reported Adj. Ebitda (ex-ESOP) margin of 2.6% (vs 1.9% in Q2), second straight quarter of Adj. Ebitda profitability. Blinkit turned Contribution positive at 1.3% of GOV (vs -0.6% in Q1). Management expects the profitability to increase further going forward and is reiterated in its target of reaching Adj. Ebitda breakeven in Blinkit by Q1FY25. 

Strong execution can keep valuations elevated: 

Analysts of IIFL Capital Services believe that the consistent delivery on growth and sooner-than-expected profitability would ensure valuations remain elevated. Their TP increases to Rs120, implying 6.2X/4.9X on FY25/26 EV/Sales. Stock is offering 36% revenue Cagr over FY23-26 and set to achieve ~Rs20bn PAT by FY26. Key risks: regulations.