Higher profitability estimates likely to drive more gains for Zomato

Analysts seem to have turned positive on Zomato. The stock hit all-time highs recently. Zomato’s gross merchandise value (GMV) growth rates may have bottomed out in Q1FY24 at 14 per cent year-on-year (Y-o-Y).

Growth should improve from Q2FY24. Take rates (commission as a percentage of GMV) may have stabilised, though improvement is not expected.

Factoring in better demand for delivery, FY24 overall might have growth estimates for 18 per cent. Higher revenue forecasts could drive adjusted operating profit growth of 10-22 per cent and a net profit upgrade between 10-30 per cent for the period FY24-FY26.

Zomato posted 14 per cent Y-o-Y growth in GMV in Q1FY24.

Analysts see improving demand in non-metro cities, as well as a favourable base effect and higher ordering in Q3FY24, driven by the festival season and the Cricket World Cup.

The second half FY24 GMV could grow at up to 21 per cent, working out to 18 per cent Y-o-Y growth for FY24.

Higher platform fees, and restaurant commissions may help keep take rates stable.

Zomato’s food delivery take rate expanded 92 bps Y-o-Y in Q1FY24, driven by about 200 bps expansion in the restaurant take rate, which offset a compression in delivery take rates due to ‘Zomato Gold Programme’.

Zomato may be able to implement a minor commission increase for restaurants and impose a platform fee for all customers. The platform fee is currently at Rs 2-3 per order in metro cities.

Zomato’s profitability metrics should see improvement over next 2-3 quarters, led by better operating leverage in food delivery and curtailment of losses in Hyperpure and Blinkit.

In Q1FY24, Zomato declared adjusted operating profit of Rs 52 crore. The second-half of FY2024 operating profit run-rate may be higher.

Losses in Blinkit, Hyperpure are expected to decline. Zomato may achieve profitability at the operating level in Blinkit in FY25.

In its Q1FY24 earnings call, the company guided to achieve operating profit in Blinkit by Q1FY25.

A modest operating profit of about Rs 26-27 crore operating profit in Blinkit in FY25 is possible. Hyperpure may only turn operating profit-positive by FY26.

The company’s medium term guidance of 4-5 per cent adjusted operating profit as a proportion of GMV should be achieved by Q3FY24.

In Hyperpure, adjusted operating losses should reduce from minus 5.7 per cent in Q1FY24 to minus 3.2 per cent in Q1FY25.

Overall, an adjusted operating profit margin of 4 per cent of GMV may be achieved as early as Q3FY24 given anticipation of strong order volumes and higher average order value during the festival season and the World Cup.

In food delivery, an adjusted operating profit of 4.6 per cent of GMV could be achieved.

This implies around 220 basis points profitability improvement over the next four quarters driven by an increase in advertising revenue of about 60 basis points, increase in Zomato Gold revenue of about 45 basis points and higher contribution from platform fees of 45 basis points.

In quick commerce, the adjusted operating profit (as per cent of gross order value) may improve by 620 basis points over the next four quarters led by scale benefits on corporate overheads and decrease in other fulfilment costs, as well as an improved order mix and better ad revenues.

Hyperpure should also see scale benefits on corporate overheads.  

The stock has moved from Rs 45 in January to around Rs 110 now. Some analysts are assessing a fair valuation in the Rs 125 range while the optimists see a valuation of Rs 160 in 12 months.