Zomato's growth prospects likely to boost Info Edge valuations

India's lower penetration in food delivery is a major trigger for Zomato

Growth prospects and re-rating of food aggregator Zomato are expected to be reflected on the Info Edge stock, which owns a 26 per cent stake in the company. HSBC believes that Zomato’s expansion of food delivery business would add 27 per cent to the expected valuation of Info Edge with around a four-fold rise in Zomato’s valuation to $3.6 billion. This, in turn, provides further upsides to the Info Edge stock.

Despite losses of $294 million in FY19 due to rising investments in the food delivery business, the key takeaway is the strong growth lever for food delivery given India’s lower penetration.

Monthly food orders in India stands at 70-75 million per month as compared to China’s 600 million. Zomato and Swiggy currently have around 75-80 per cent market share in the food delivery business.

Monthly orders in India is expected to reach 300 million by FY24, giving up to 40 per cent share to Zomato. This would lead to a rise in delivery fees charged to customers, contributing to the overall top line.

Analysts believe that delivery fees to customers will go up gradually as people become habituated with the convenience of getting food delivered and be willing to pay more as was the case with BookMyShow. The aggregator in the entertainment industry, for instance, charges 15-20 per cent or more on each ticket. In FY19, Zomato clocked over four times rise in food delivery revenue, leading to a three-fold jump in overall revenue to $206 million. Rising awareness and preference for take-home food were responsible for the jump.

Apart from top-line growth, likely improvement in penetration would help drive the profitability with lower cost per order and lower delivery time, which should improve financials as observed in case of Meituan -- a food delivery giant in China. With an increase in penetration level in China, Meituan’s delivery time fell to 28 minutes per order in June 2018 from 38 minutes in FY15. In FY19, Zomato’s per-delivery cost declined by 24 per cent from FY18.

Starting of cloud kitchen and the recent acquisition of drone delivery (delivery mostly via unmanned aerial vehicles) start-up TechEagle Innovations further offer earnings growth for Zomato’s food delivery business. While cloud kitchen would add to the top line, drone delivery would help reduce delivery cost. Cloud kitchen is mainly a restaurant kitchen that takes only online orders with no dine-in services.

“Zomato is on the right path of expanding its food delivery and is also gaining market share. This, coupled with the rise in its valuation in the last two years, would create good value for Info Edge,” says Sanjeev Hota, head of research at Sharekhan. How the competitive intensity pans out for the food delivery business could be critical but analysts expect Zomato to profitable at the operating level by FY24. Apart from Zomato, the improved performance of standalone business segments (mainly naukri, 99acres and Jeevansathi) during April-December is a positive for Info Edge. 

Revenue growth of naukri in 9MFY19 improved to 17 per cent from 12 per cent in FY18 and that of 99acres rose to 40 per cent from 21 per cent. While naukri contributes around 70 per cent of Info Edge’s revenue, 99 acres accounts for 20 per cent share.

Analysts believe given the strong digitisation consumption in the country, Info Edge deserves a premium valuation. The stock was up about 14 per cent in the last three months, outperforming the Nifty IT index that rose around 12 per cent.