Zomato set to turn profitable in FY25 at 29% revenue CAGR: Motilal Oswal

Brokerage expects Zomato to gain from the nascent stage of the food delivery ecosystem in India, sees its food delivery GOV surging to Rs 38,400 cr in FY25 from Rs 21,300 cr in FY22

Food aggregator platform Zomato is expected to turn profitable in the financial year 2025, on the back of a 29 per cent revenue CAGR between FY23 and FY25. The growth, according to a recent report, is being fueled by higher penetration, a higher proportion of transacting users, and increased ordering frequency.

“We expect Zomato to gain from the relatively early stage of the food delivery ecosystem in India, as increased formalisation along with growing share of platform-led delivery (currently at 7 per cent of overall food consumption) should help boost its food delivery GOV (gross order value) to Rs 38,400 crore in FY25 from Rs 21,300 crore in FY22,” said the report by domestic brokerage firm Motilal Oswal Financial Services.

The average order value in Zomato’s food delivery business is predicted to remain flat in FY23, but will rise to Rs 409 by FY25. “Higher penetration and usage of Zomato should drive 13 per cent CAGR in MTU (monthly transacting users) over FY23-25, resulting in a 23 per cent CAGR for the vertical during FY23-25, despite high-teen growth in FY24E amid near-term weakness,” the report added.

Revenue from the firm’s side businesses, Hyperpure, at an estimated 36 per cent CAGR between FY23-25E, and Blinkit, 27 per cent CAGR between FY23-25E, adjusted for full FY23, is also likely to remain strong for the next few years as the company expands its operations.

With the exit of Amazon, the food delivery market is now a settled duopoly with Zomato having a 55 per cent market share and rival Swiggy having 45 per cent. The report says the market has a very high moat given the significant capital requirement to displace the incumbents.

“We expect (Zomato’s) gross margin to improve to 33.5 per cent in FY25 from 5.3 per cent in FY22 as the employee cost and other expenses as a percentage of sales decrease,” said the report.

The Gurugram-based firm’s losses had widened 5.5-fold to Rs 346.6 crore in the quarter ended December, from Rs 63.2 crore in the corresponding period of the previous financial year. Revenue for the firm, however, surged 75 per cent to Rs 1,948.2 crore from Rs 1,112 crore in the year-ago period and upper management at the firm was confident that it will reach adjusted Ebitda break-even (ex-quick commerce) by Q2 of FY24.

Zomato’s subscription offering, Zomato Gold, is also expected to help the firm compete on more equal terms with its unlisted rival Swiggy. The offering had seen adoption from 900,000 customers in its first month itself.

However, the current duopoly could delay scale gains. A split market without a clear leader would hit margins due to the absence of efficiency gains from order bunching. Continued spends due to elevated competitive intensity from Swiggy should weigh on Zomato’s operating costs in FY24.

“We view the limited distinction between Zomato and Swiggy’s offerings – both having food delivery, dine-in and quick commerce – as a concern,” the report said, adding, “Continued spends due to elevated competitive intensity from Swiggy (unlisted) should weigh on Zomato’s operating costs in FY24, making it difficult to breakeven.”

The acquisition of Blinkit is also viewed as an additional risk and high attrition at senior management level remains a concern for the food aggregator.

The brokerage has, however, initiated a coverage on Zomato’s stock with a BUY rating and a target price of Rs 70, implying 30 per cent potential upside.

The food delivery industry, the report says, is currently at a nascent stage in India with a long runway of growth. This growth is expected to be largely driven by intensifying internet penetration, rising consumption and growth in urbanization.  

The industry is projected to grow at a CAGR of 19 per cent over FY23-25 – compared to slowing growth in other markets – fuelled by growth in the number of transacting users and order frequency. This should lead to a higher share of online food ordering at around 24 per cent by FY25, from 13 per cent in FY21.