Zomato Ltd.'s fair value has been raised by Kotak Institutional Equities owing to its higher contribution margin in the food delivery business, better cost optimisation and a large increase in its asset base in FY23.
The contribution margin of Zomato's food delivery business "increased handsomely" to Rs 18.5 per order in FY23 from Rs 6.6 in FY22, driven equally by higher revenues and cost optimisation, said an analyst at Kotak in an Oct. 23 report.
The large hike was driven by a Rs 6.3 increase in revenue per order, which comprises Rs 2.7 from a higher take rate and Rs 3.6 from higher ad revenue, and a Rs 5.2 reduction in variable costs, driven by lower discounts and other costs. There's also a minor Rs 0.4 per order due to a reduction in delivery costs, according to the note.
Adding to this, the acquisition of quick commerce startup Blinkit for Rs 4,447 crore created a goodwill of Rs 350 crore, increasing the intangible assets of Zomato, according to Kotak.
"We note that the acquisition was accounted for at Zomato's stock price of Rs 55.45 (price as of the date of closure of the acquisition) as opposed to a price of Rs 70.76 when the acquisition was announced," it said.
However, it also noted high churn in Zomato's user base. "Zomato catered to 5.8 crore annual unique transacting users in FY23, compared with 5.3 crore in FY22 for its food delivery business. It added 2.2 crore users in FY23, indicating high user churn, considering net user addition was only 50 lakh."
This implies a large churn of 1.7 crore users. "Higher churn in FY23 can be attributed to the reduction in the company's geographical presence to 750 cities from 1,000+ cities, the commencement of the Zomato Gold programme and the resultant merging of multiple accounts within a household into a single account, the dining out revival, and the resultant lower demand for food delivery," it said.
Kotak maintained its 'buy' rating but revised its fair value upwards to Rs 125 from Rs 100. Of the 29 analysts tracking the company, 25 maintain a 'buy' and four recommend a 'sell', according to Bloomberg. The average 12-month consensus price target given by analysts implies a downside of 3%.
Shares of Zomato fell as much as 3.08% to Rs 105.55 apiece on Wednesday, before paring losses to trade 0.5% lower at Rs 108.35 apiece. That compares with a flat Sensex at around 11 a.m.
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