Home / Markets / Mark To Market /  Zomato’s road ahead is set to be arduous

Zomato Ltd’s shares are 18% below its issue price of 76 apiece and sentiments about the stock are unlikely to improve unless there are meaningful signs of a turnaround in profitability. This is despite the food delivery company having done well on some counts in the March quarter (Q4FY22), especially on improving its disclosures.

The average monthly transacting users (MTU) reached an all-time high of 15.7 million in Q4. However, this metric has been pretty much around the same level for the past three quarters.

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The company will aim to increase the ordering frequency to drive growth, the management said in its maiden earnings call. This would be a tall order as the ordering frequency of existing customers can increase only to a certain extent. Beyond that, the addition of new customers would remain crucial.

“Focus on frequency over new users may raise some concerns, but we note that MTU (about 30% of annual transacting users) would still rise," said analysts at Jefferies India in a report on 24 May.

There is some scope for this measure to grow as the annual order frequency is just about 10 times per user, according to the management.

Around 90% of its food delivery business comes from repeat customers, the company said. Also, new users are being acquired organically. This means lower customer acquisition costs, which bodes well for profitability. In FY22, Zomato was contribution profit positive in 120 of the top 300 cities. Reduction in fuel taxes and other initiatives such as better utilization of the fleet will support Zomato’s aim to achieve double digit contribution margin in the long term.

The path ahead is arduous. “We believe there is a potential for revenue to double over next three years (FY25), which means that they will breach towards $1.2 billion. However, valuations will not see a significant re-rating unless there is a spike in the contribution margin/unit economics or some visible turnaround in any emerging business (Hyperpure or quick commerce)," said Karan Taurani, analyst at Elara Capital (India) in a note. Hyperpure is Zomato’s supplies platform for restaurants.

The company intends to invest $400 million in quick commerce over CY22-23. This is at a time when it is already running in losses and the path to profitability is unclear. “Obsession to become a hyper-local signals Blinkit deal is imminent, which will bring in a new stream of loss and uncertainty," added the Jefferies report.

Meanwhile, rising yields and market volatility have prompted analysts at JM Financial Institutional Securities to raise the weighted average cost of capital to 13% from 12%, leading to a revised discounted cash flow-based target price of 115 versus 140 earlier.

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