Strong prospects may drive growth rates for food delivery platform Zomato

Zomato’s food delivery business reported 6 per cent Q-o-Q (27 per cent Y-o-Y) growth in Gross Order Value or GOV. The base of Monthly Transacting Users (MTU) grew 2.2 per cent Q-o-Q to 18.8 million. The gross take rate (including delivery charges) declined by 20 basis points (bps) to 23.9 per cent due to lower delivery charges collected from customers. The contribution margin rose 50bps Q-o-Q to 7.1 per cent.

In the quick commerce segment, Blinkit GOV was Rs 3,500 crore (up 28 per cent Q-o-Q and up 103 per cent Y-o-Y), led both by stronger MTU and better ordering frequency. Contribution margin in Blinkit moved to 2.4 per cent in Q3FY24 from 1.3 per cent in Q2FY24. Blinkit intends to increase store density in existing areas of operations and plans to open 100 dark stores in FY24. The monthly active restaurant base on the platform has grown 20 per cent Y-o-Y in Q3FY24. This growth is driven by new restaurants opening up and increase in coverage of existing restaurants.

In quick commerce, strong growth was driven by an uptick in demand due to festivals, having a right assortment, and ensuring consistently high service levels by better inventory management and ensuring availability of adequate delivery partners during peak demand. Zomato added 40 new stores during the quarter, taking the overall count to 451 stores. In addition, Hyperpure revenue grew 15 per cent Q-o-Q (104 per cent Y-o-Y) to Rs 860 crore in Q3FY24, driven by growth of both the restaurant supplies business and quick commerce.

Management guided that Q4FY24 would see 4.8 per cent increase in orders in food delivery with GOV going up by 4 per cent. Take rate may recover to just above 24 per cent. In quick commerce, orders may rise to 64 million from 56 million in Q3FY24. GOV should hit Rs 4,070 crore with contribution margin of 4.1 per cent and operating profit breakeven may be reached.

Both food-delivery and quick commerce segments could witness further uptrends in business through FY25 with food delivery likely to see GOV growth of 18 per cent plus across FY25 and FY26, with a likely rise in contribution margin to about 7.5 per cent. In quick commerce, improving profitability and strong growth can be coupled to apparent weakness in competition (funding concerns in Dunzo). The number of days for a dark store to hit 1,000 orders/ day has reduced to 2 months in Q3FY24 from almost 6 months in Q4FY23. By FY27 or FY28, the GOV for quick commerce may exceed that in food delivery. Food delivery also has an alternate revenue stream of advertisement. The key downside risks are that there’s already been capital allocation of $1.5 billion cash, and any slowing of growth could impact badly.

Revenues grew to Rs 3,288 crore in Q3FY24 versus Rs 1,948 crore in Q3FY22 and versus Rs 2,848 crore in Q2FY24. The company reported Rs 51 crore in operating profit in Q3FY24 versus loss of Rs 366 crore in Q3FY23 and loss of Rs 47 crore in Q2FY24. Other income was Rs 218 crore in Q3FY24 versus Rs 173 crore in Q3FY23 and Rs 212 crore in Q2FY24. Net profit was at Rs 138 crore versus Rs 346 crore loss in Q3FY23 and Rs 36 crore net profit in Q2FY24. Margin drivers for the quarter include improvements in ad-monetisation, introduction of platform fees (including Zomato Gold members) since July 2023 and better cost efficiencies.

Analysts are upgrading valuations and 12-month targets by around Rs 30-40 /share. The stock gained 5 per cent on the results.