Zomato has the right execution ingredients in place, for now
Zomato Ltd’s shares have gained as much as 15% since its September quarter (Q2FY24) results surpassed expectations, particularly on growth. Not only did more customers order last quarter, but the frequency of ordering was higher, too. This was largely driven by its loyalty programme—Zomato Gold— where the members doubled to 3.8 million.
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The upshot is that gross order value (GOV) rose by 9% sequentially in the food delivery business. That’s not all. In Q3, Zomato expects GOV sequential growth to be in high single digit. Further, its quick commerce business, Blinkit, is on track to turn adjusted Ebitda positive by Q1FY25. The segment was positive at the contribution profit level for the first time in Q2.
But there are two sides to a coin. The rise in Gold members was a drag on Zomato’s margin. The contribution profit as a percentage of GOV in its core food delivery business was up by a mere 20 basis points (bps) sequentially to 6.6%. In Q1 and Q4FY23, the measure grew by 60bps and 70bps, respectively.
This is even as there was a levy of platform fee and better ad monetization in Q2. A Gold order is relatively less profitable due to factors such as high delivery cost, priority service to Gold members and cost due to the no-delay guarantee benefit available to Gold members. Clearly, Zomato is choosing growth over profitability.
To be sure, a rise in Gold members boosts ordering frequencies and ensures customer stickiness. Interestingly, the company expects the pace of growth in Gold members to slow down. In this backdrop, Nomura Financial Advisory and Securities (India) believes that it will be a challenge for Zomato to achieve double-digit contribution margin with high growth in the long term.
In Q3, the festival season is likely to have a much more positive impact on quick commerce than food delivery. After a weak Q1, Blinkit clocked sequential GOV growth of 29% to ₹2,760 crore in Q2, although it is still in the red. Blinkit is expanding its network and aims to add 100 new stores in FY24 and expects the count to stand at 480 stores by the year end.
Given this, analysts at Nuvama Research have increased their revenue estimates but have lowered profitability expectations as Zomato will invest to drive growth.
After accounting for the rally post results, shares of Zomato have more than doubled in 2023 so far to ₹123.30 apiece. The good run may well continue if Blinkit turns profitable and the food delivery business sustains its growth rates.
