Zomato Q2 Results Review - Another Quarter Of Strong Beat; Blinkit Continues To Surprise: Motilal Oswal

Motilal Oswal Report

Zomato Ltd. delivered another good quarter, with Q2 FY24 revenue growth of 18% QoQ (Rs 28.5 billion) beating our estimates of 11% growth. Growth was led by Blinkit, up 31.5% QoQ. The food delivery business also outperformed, with revenue growth of +12.7% QoQ on the back of strong order volume.

Adjusted Ebitda margin at 3.0% missed our estimate of 3.6%, partly due to lower profitability in gold customer orders (40% of total gross order value). The management expects further expansion in margins, as the gap between Gold and non-Gold customers narrows with scale, helping it move toward food delivery adjusted Ebitda margin of 4-5% of GOV. Zomato continues to expect a breakeven in Blinkit in Q1 FY25 despite maintaining a high pace of new store addition.

The performance of food delivery and quick commerce businesses was promising. With the company expecting strong growth for both Blinkit and food delivery in Q3 FY24, we expect Zomato to deliver a strong 65% YoY growth in FY24. Zomato should deliver a revenue compound annual growth rate of 32%/116% in food delivery/quick commerce verticals over FY23-25, helping it grow its consolidated adjusted revenue by 53% over the same period.  The company was successful in increasing its take rate by a sharp 70 bp QoQ in food delivery with the introduction of platform fee and continued traction in ad monetisation. While we expect the pace of the take rate increase to start moderating now, advertisements remain a potential driver of further upside on take rate and profitability of the business.

Blinkit’s contribution margin turned positive in Q2 on the back of strong growth. Strong revenue growth should drive significant margin leverage, given the fact that competitive pressure in quick commerce has eased considerably over the last few quarters due to a funding crunch for smaller peers.

We now estimate Zomato to turn positive on reported Ebitda by Q3 FY24 (earlier Q4 FY24) and deliver 4.1% Ebitda margin in FY25. As a result, Zomato should report profit after tax of Rs 2.4 billion/Rs 8.8 billion in FY24/FY25.

We remain positive about the long-term growth opportunity for Zomato and do not expect competition to intensify further despite the entry of ONDC in the space. Our discounted cash flow-based valuation of Rs 135 suggests a 16% upside from the current price. We reiterate our 'Buy' rating on the stock.

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