Amid widening losses, strong user addition drives growth for Zomato in Q2

Despite widening losses, stock gains on top-line showing, acquisition plans

The country’s largest listed foodtech company, Zomato, surprised the Street with strong top-line performance in the September quarter. Aided by a 158 per cent jump in gross order value (GoV) year-on-year (YoY) in the India food delivery business, revenue for the company was up 140 per cent YoY.

On a sequential basis, growth came in at 21 per cent and was significantly higher than Street estimates. Growth in GoV was due to a higher number of restaurants, delivery partners, and transacting customers on its platform.

The company indicated that the 26 per cent increase in the number of transacting users (15.5 million) was on account of an increase in branding and marketing expenses. Zomato invested an incremental ~40 crore in television and digital marketing, compared to the June quarter. The higher investments were made to expand its user base and get customer traffic back (lapsed users) to the platform.

The higher spending dented profitability, with adjusted operating loss increasing sequentially to ~310 crore, compared to ~170 crore in the June quarter. The contribution margin — as a share of GoV — slipped to 1.2 per cent, compared with 2.8 per cent in the previous quarter.

Despite widening losses, the stock gained 3.7 per cent in trade. In addition to the top-line performance, analysts at ICICI Securities highlight the management’s ambition of hitting the $10-billion revenue mark, from the current $261 million.

Like Alibaba and Tencent, the company indicated it would take the investment route to scaling up hyperlocal e-commerce, instead of doing it in-house.

As part of this strategy, the company has taken stakes in health and fitness start-up Curefit, business-to-business logistics technology company Shiprocket, and Magicpin (a platform for discovery and savings in offline retail). The company will be investing an additional $1 billion over the next few years to expand its presence, with a larger share of the investments going into quick commerce (deliveries within 30 minutes).

Most brokerages are confident about the stock, with target prices in the ~170-220 range. From the current levels, at the lower end of the target band, there is an upside of 21 per cent. While the Street is upbeat, investors have to be mindful of the fact there is a risk of higher cash-burn/operating losses in the near to medium term, which may weigh on the stock.