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Motilal Oswal Report
Zomato Ltd. delivered an excellent Q1 FY24 performance, as it turned profitable and reported strong revenues of Rs 24.1 billion (up 17.5% QoQ), much ahead of our estimates of 9.9% QoQ growth and a profit after tax loss.
Revenue growth was led by the food delivery business (up 17% QoQ). While Blinkit was muted (+5% QoQ) due to disruptions in April-May, it should reverse in Q2 (20% QoQ growth guidance). The management has guided for strong 40%/60% plus growth for Zomato (consolidated)/Blinkit over the next few years, which surprised us on the upside.
Zomato's Q1 FY24 adjusted Ebitda margin at 2.2% was significantly ahead of our estimate (-3.1%) on account of a higher take rate and lower operating costs. This helped the company brake-even on profit after tax (Rs 20 million), ahead of its Q4 FY24 guidance.
The management expects the company to sustain profitability as it moves toward food delivery adjusted Ebitda margin of 4-5% of gross order value eventually, along with accelerated break-even in Blinkit over the next four quarters.
We see the strong all-round performance from Zomato as an indicator of an accommodative competitive environment in both food delivery and quick commerce verticals. Moreover, the sharp 80 bp QoQ increase in take rate in food delivery highlights its success in cross-selling ads to restaurants, which is a more sustainable revenue stream rather than depending on increase in take rate.
We expect Zomato to deliver 25%/107% revenue compound annual growth rate in food delivery/quick commerce verticals over FY23-25, helping it grow its consolidated adjusted revenue by 43% over the same period.
Strong revenue growth should drive significant margin leverage, given the fact that competitive pressure in quick commerce has eased considerably over the last few months due to a funding crunch for smaller peers. We now estimate Zomato to turn positive on reported Ebitda by Q4 FY24 and deliver 5% Ebitda margin in FY25 (versus our earlier estimate of break-even in FY25). As a result, Zomato should report profit after tax of Rs 1.3/Rs 8.3 billion in FY24/FY25.
We remain positive on the long-term growth opportunity for Zomato and do not expect competition to intensify further despite the entry of ONDC in the space.
Our DCF-based valuation of Rs 110 suggests a 27% upside from the current price. We reiterate our 'Buy' rating on the stock.
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