Zomato's Q1 show drives stock 9% higher; analysts remain divided on outlook

Analysts believe a strong topline growth is what enthused investors, pushing them to lap up Zomato shares

In its first-ever quarterly results as a listed entity, food service provider Zomato put up a mixed show. While the company's loss swelled by over three times to Rs 356 crore in the June quarter (Q1), investors focussed on the better-than-expected revenue performance, driving the stock nearly 9 per cent higher to Rs 135.80 per share on BSE on Wednesday. However, the stock was still trading below the listing day's high of Rs 147.80 touched on July 27, 2021, but was up 51 per cent over the issue price of Rs 90 per share. 

The company's revenue from operations in Q1 rose to Rs 844.40 crore, from Rs 266 crore a year ago, on the back of Zomato's core food delivery business, which continued to grow despite the severe Covid wave that started in April. The reported revenues were significantly ahead of our estimates, led by a 37 per cent QoQ rise in GOV (gross order value), Jefferies noted.

Analysts believe a strong topline growth is what enthused investors, pushing them to lap up shares. "Investors are surprised by the topline growth as they were expecting a dent due to the second Covid wave. Taking this into account, the expectation is that growth will accelerate from hereon over the next couple of quarters and that's what the market will be looking at now," said Jyoti Roy - DVP- Equity Strategist at Angel Broking.

Jefferies, meanwhile, increased its FY22-24 revenue estimates by around 10-20 per cent. "We expect a 36 per cent CAGR in delivery GOV over FY20-26E to reach $9 billion by FY26. We assume the limited impact of Covid-19 in FY22 and expect GOV growth to accelerate. Unit economics is likely to dip in FY22/23 as Zomato invests behind new user acquisition and order volume growth, before recovering gradually over FY24-26," Vivek Maheshwari, Jithin John and Kunal Shah, analysts at Jefferies said in a results note.

Zomato, however, said it will do earnings calls only once a year, at the end of each financial year, where the firm will share a more detailed commentary on the year gone by, along with key metrics.

This lack of details on MTU (monthly transacting users), AOV (average order value) and unit economics (provided in RHP), could disappoint investors as could the decision of an annual earning call, noted Jefferies. That said, the brokerage remains bullish on the company and even raised its target price marginally to Rs 175 per share from Rs 170 earlier, translating into an upside potential of 35 per cent from current levels.

Further, the company's EBITDA (earnings before interest, tax, depreciation and amortisation) loss widened by 42 per cent to Rs 170 crore on a quarterly basis. Zomato's chief executive officer (CEO) and co-founder Deepinder Goyal and CFO Akshant Goyal in a blog post said the reported loss in Q1 was "largely on account of non-cash employee stock option plan (ESOP) expenses, which have increased meaningfully in Q1 of 2021-22 (FY22) due to significant ESOP grants made in the quarter pursuant to the creation of a new ESOP 2021 scheme. This divergence in reported profit/loss and adjusted Ebitda will continue, going forward".

Analysts at Jefferies said while adjusted EBITDA loss was on expected lines, reported EBITDA loss is higher due to ESOP charge, which is non-cash and is built into share dilution. They raised EBITDA loss estimates but continue to see break-even by FY25-26. "We have also made changes in our model structure to separately account for ESOP charge from here-on and have also raised this. However, this has no cash flow impact and we already built-in 8 per cent dilution," it said.

Adding on, Roy said if the company is able to grow and maintain losses then margins will accelerate and that will be taken as a positive.

According to Dolat Capital, growth in GOV is strong but the contribution, though positive, is down QoQ, led by increased delivery cost burden and higher discounts. This suggests the growth is more pushed through subsidies. which in turn increases the magnitude of losses, the brokerage noted. "Also, the increased burden from ESOP cost would mean no near term operating leverage either. Thus, we maintain our Sell rating on Zomato with a target price of Rs 90," the brokerage said.