Zomato's 'surprise' faster profit timeline may help serve more gains

Zomato's food delivery revenue (excluding delivery charges) grew 17 per cent Q-o-Q and 28 per cent Y-o-Y

Zomato delivered a positive surprise with its strong results for the first quarter of the 2023-24 financial year (Q1FY24). The company reported revenues of Rs 2,416 crore (up 17.5 per cent quarter-on-quarter or Q-o-Q). Revenue growth was led by the food delivery business (up 17 per cent Q-o-Q). Blinkit growth was muted (up 5 per cent Q-o-Q) due to disruptions caused by rain in April-May and changes in delivery partner payment structure. But the management guidance is for 20 per cent Q-o-Q growth in Q2FY24 in Blinkit.

Zomato’s food delivery revenue (excluding delivery charges) grew 17 per cent Q-o-Q and 28 per cent year-on-year (Y-o-Y). Hyperpure’s (the B2B initiative connecting restaurants with suppliers) revenue grew 29 per cent Q-o-Q. The Q1FY24 adjusted operating profit margin -- at 2.2 per cent -- was positive which beat Street expectations of a negative operating profit. Unadjusted consolidated operating profit loss was Rs 48 crore, down from Rs 225 crore in Q4FY23.

This turnaround is driven by higher take rates (platform fee) and lower operating costs. The company reported a small net profit of Rs 2 crore, exceeding its guidance of break-even in Q4FY24. Reported operating profit (without adjustment) could turn positive by Q4FY24.

The management is confident of sustaining profitability with a food delivery operating profit margin of 4-5 per cent of gross order value, as well as faster break-even in Blinkit over the next four quarters. Zomato may sustain the positive operating profit performance and it could hit 5 per cent operating profit margin by FY25, and this could enable net profit of Rs 130 crore and Rs 830 crore in FY24 and FY25, respectively.

Zomato also seems to have achieved traction in cross-selling advertisements to restaurants which is another revenue stream and there has been an 80 basis point Q-o-Q uptick in the take rate in food delivery.

Analysts are estimating a potential 25 per cent annual growth in food delivery revenues and over 100 per cent growth rate in Blinkit revenues (quick commerce), leading to 43 per cent revenue growth over FY23-FY25.  The competitive pressure in quick commerce has eased as Dunzo has experienced a cash crunch.

The management is confident of achieving 40 per cent organic growth, or better, over the next two years, assuming that the demand slowdown is over. Growth is likely to be driven by an increase in the number users. Monthly transacting users (MTUs) in food delivery increased by about 5.4 per cent Q-o-Q, to 17.5 million users. Blinkit’s positive trends could include wallet share gains and strong operating leverage – there’s room for growth with 4.5 million MTU and a limited geography. Hyperpure has also seen strong growth with an enhanced minimum order value.

A decrease in employee expenses was due to “right-sizing” that started in December, 2022. There will be wage hikes in Q2FY24 so employee expenses could rise. Management ruled out shareholder returns -- such as dividends -- until further notice.

The analyst perspective has changed with many upgrades of projections and price-targets. Investors were obviously very happy with the results and guidance. The stock jumped 10.7 per cent after the results, closing at Rs 95.4 and several analysts have target prices in the range between Rs 110-130, which suggests further upside.