Analysts flagged a slowdown in Zomato Ltd.’s monthly transacting users, and gross order value as the online food ordering platform offered discounts on customer delivery charges and dining out picked up in the third quarter.
Here's what brokerages made of Zomato's Q3 performance:
Jefferies
Maintains 'buy', cuts target price to Rs 120 from Rs 175, still implying a potential upside of 27.4%.
After a strong Q2, an underwhelming gross order value and monthly transacting users in Q3 will raise questions on India opportunity.
Earnings release remains opaque, lacks substance, and describes only selective aspects of the business. Lack of management call leaves a lot to the imagination and our inexperience with the internet sector does not help either.
Following a weak Q3 (lower loss, though) and pullback in global comps, it's a 'roller coaster buy' on expectation of a pickup.
Weak gross order value growth was due to reduction in delivery charges and post-Covid reopening resulting in a shift towards dining out.
Cuts FY22-26 GMV by 49% to reflect the muted performance in Q3. While Q2 nudged us to build a faster top line at the cost of profitability, we now trim growth, but raise profitability.
The past two quarters signal how unpredictable this business (and probably internet sector) is likely to be, but we remain confident on the structural India growth story.
Management should face tough investor questions through an earnings call rather than providing abstract details on the business.
Morgan Stanley
Stays 'overweight' with a target price of Rs 150, implying a 60% upside.
A lack of growth in monthly transacting users quarter-on-quarter and a slowdown in gross order value (even after adjusting for lower delivery charges) more than offset the positive from lower burn rates quarter-on-quarter and could limit the stock price in the near term.
Skew reflects our view of a higher chance of a rapid pickup in online penetration with large players remaining dominant even with any new potential competition coming in.
Risks to upside: Faster-than-expected execution in new adjacencies; higher-than-expected average order values which would lead to upside risks to margins.
Risks to downside: Delay in transition from home-cooked food mindset to restaurant food; potential entry of a new player and low switching costs; regulatory changes around labour laws; growth and profitability trade-off.
Dolat Capital
Maintains 'sell', cuts target price to Rs 75 from Rs 90, implying a 21% downside.
Result is a miss, delivery traction slows down; unit economics slips.
Excluding Hyperpure Business, Zomato’s growth was just 4.1% quarter-on-quarter for its food delivery, dining out and the Middle-East delivery business. This tepid growth came in a seasonally strong quarter due to festivities.
Gross order value was down largely due to lower discounts on coupon by Rs 5 per order (although similar discount was given in delivery charge) and some structural shift to dining-out.
With early signs of partial resumption of delivery to dining-out (highlighted in Zomato’s letter), we remain cautious as people are expected to go out more to experience dining.
Factoring in for lower-than-expected operating leverage, have resulted in higher losses expectancy in coming years. EBIT losses are now expected to higher by 11%/32% for FY22/FY23.
The new user acquisition data (disclosed in Q3) is highlighting significant churn as 45% of monthly transacting users is driven by new users each quarter. This would mean that the company would continue to subsidise its operation to drive new users as well as increase engagement for existing user to invest into ‘habit formation’.
Our take on Zomato giving discounts on customer delivery charges is not positive as the core proposition for Zomato is convenience of delivery which consumers should appreciate and fund incrementally. On the contrary, Zomato is increasing discounts on delivery to normal users and also subsidising delivery charges for power users—ordering more than 50 times in a year via Zomato food delivery app—by offering free delivery on pro+ membership.
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