Rating: Buy, Zomato: Improvement in profitability

Zomato reported Q4FY23 revenue of `20.6 billion, up 5.5% q-o-q/70% y-o-y, in line with estimates. Blinkit led revenue growth, increasing by 21% q-o-q. Food delivery revenue showed modest growth of 2% q-o-q (GOV -2% q-o-q) due to seasonal and macroeconomic factors. Zomato’s food delivery vertical experienced its second consecutive quarter of declining order volume and a 5% decrease in users (MTUs), despite a strong response from Gold members.

Management anticipates a significant improvement in the growth rate of food delivery gross order value (GOV) during Q1of FY2024. They expect the growth rate to be in the high single digits when compared to the previous quarter (q-o-q).

Zomato’s adjusted Ebitda margin in Q4FY23 was better than MOFSL, with an adjusted Ebitda loss of 6.9% of revenue compared to MOFSL’s -10.4%. This was attributed to effective cost control and a higher take rate. Excluding Blinkit, Zomato achieved positive Ebitda due to significant improvement in food delivery profitability, with an adjusted Ebitda margin of 5.1%. Blinkit’s adjusted Ebitda loss also improved, narrowing to -9.9% in Q4, driven by a better take rate and growth in store-level GOV. Zomato provided guidance for achieving consolidated net profit breakeven within the next four quarters.

Zomato’s food delivery performance has been stagnant with flat q-o-q growth rate in GOV from Q1 to Q4. However, the company has shown a significant improvement in profitability, with a turnaround of `1.9 billion over the same period. We anticipate that the strong increase in Gold membership will aid growth in FY24, with a projected 14% y-o-y increase in GOV. It’s worth noting that this growth may slightly impact the contribution margin due to an uptick in availability fees.

Blinkit’s robust store-level performance (orders per day, per dark store up 25% q-o-q) should help it reach contribution breakeven in the next 1-2 quarters. With a cautious expansion in FY24 store count, we expect growth to moderate a bit, although GOV should still grow at 80% y-o-y next year.

We now expect Zomato to breakeven on adj. Ebitda level in Q3FY24 and on reported PAT by Q4FY24. Improving profitability should help it deliver FY25E adj. Ebitda of `4.2 bn before turning reported Ebitda positive in FY26E. Our estimates imply FY23-25 revenue CAGR of 36% and 13.1% improvement in adj. Ebitda margin, leading to a PAT turnaround over the period.

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 `80/sh suggests a 24% upside from current price. We reiterate our Buy rating on the stock.

The food delivery business is still at a nascent stage in India with a long runway for growth. With dominant market share and strong growth in the food delivery business and Hyperpure, we expect Zomato to report a strong 36% revenue CAGR over FY23-25. We further expect Zomato to breakeven in Q4FY24, in-line with the management guidance.

Zomato has made three senior promotions to CEO/COO roles that moderate our concerns on high attrition at senior leadership level.  We value the business using DCF methodology, assuming 4% terminal growth rate and 12.5% cost of capital. We maintain our Buy rating with a TP of `80, implying 24% potential upside.