Q4FY23 Review: Zomato: Accelerating on the path to profitability

22 May 2023 , 11:06 AM

Zomato’s Q4FY23 adjusted revenue grew 2.2% QoQ/57% YoY. Food Delivery GOV declined by 1.7% QoQ on lower days in Q4 and rationalising ~225 cities, coupled with consumption slowdown. Blinkit continues to show strong traction of a small base with GOV/revenue growing 17%/21% QoQ. Food Delivery contribution margin increased to 5.8% of GOV (vs 5.1% in 3Q). Adjusted Ebitda loss (ex-ESOPs) narrowed to Rs1.4bn (was Rs2.4bn in Q3), while ex-Blinkit business became Ebitda-positive for the first time. Management is hopeful of turning PAT positive by Q4FY24 and reiterated margin aspirations of ~4-5% of GOV for the Food Delivery business over the medium term. While near-term growth in Food Delivery has moderated, there should be sequential pickup from Q1FY24 onwards.

Food Delivery remains weak, worst may be behind: 

Adjusted revenues rose 2% QoQ to Rs24.1bn (+57% YoY), as Food Delivery reported the 2nd quarter of sequential decline. Hyperpure continued its momentum growing 14% QoQ (+146% YoY), while Blinkit grew 21% QoQ as more customers adopted the quick commerce platform. The company highlighted that Food-Delivery slowdown was coupled with lesser working days in Q4 and shutdown of ~225 cities in Jan; while they have continued to gain market share.

Business turns adjusted Ebitda (ex-Blinkit) profitable: 

Adj. Ebitda loss (ex-ESOP) came in at Rs1.4bn in Q4 vs Rs2.4bn in Q3, implying Adj. Ebitda margins of -5.8%. Ex-Blinkit, Zomato delivered the first quarter of profit of Rs0.3bn, implying margin of 1.4%. Zomato aims to be Ebitda (and PAT) profitable on a consolidated basis within the next four quarters vs Analysts of IIFL Capital Services expectation of 7-8 quarters from here.

Path to profitability key catalyst for valuation re-rating: 

Quicker path to profitability is the key catalyst for the stock. Analysts of IIFL Capital Services reduce loss expectations for FY24/25 now, but maintain FY26 as a full year of being PAT-positive. Their DCF-based TP remains unchanged at Rs80, implying 5.5X/3.3X on FY24/26 EV/Sales. Stock is trading at 4.2X FY24 EV/Sales, offering 33% revenue Cagr over FY23-26. Key risks: regulations, M&A.