Zomato’s improved disclosures is appetizing; all eyes on first earnings call

Zomato Ltd’s shares surged to a high of Rs67.60 apiece in Tuesday’s morning trade on NSE. This represents an 18.5% gain from previous closing. This comes on the back of the company announcing March quarter (Q4FY22) results after market hours on Monday.

This time, through its earnings release, Zomato has offered good insights into important business parameters. Recall that the lack of adequate details along with its quarterly results has been a key concern for investors so far. “Ahead of its maiden investor call, management proactively improved disclosures & addressed key issues. Focus is growth along with loss reduction, a tough balancing act but management seems to be committed,” said analysts from Jefferies India in a report on 23 May.

Even so, the stock continues to languish below its issue price of Rs76 apiece during its initial public offering last year. Amid the broader market correction, Zomato’s shares are down more than 50% so far this calendar year.

In Q4, the food delivery segment, which contributed 83% to overall adjusted revenue, saw revenue growth of 70.7% year-on-year (y-o-y) to Rs1280 crore. Sequential revenue growth was 6.7%. Average order value remained flattish but order volumes grew leading to rise in gross order value (GOV) by 77% y-o-y and 6% sequentially.

As a percentage of GOV, contribution profit and adjusted Ebitda (earnings before interest, tax, depreciation and amortization) loss saw an improvement sequentially. This was driven by higher restaurant commission, advertisement sales and savings on delivery costs and discounts.

Zomato’s other business, Hyperpure, which is the company’s supplies platform for restaurants, registered a 19% sequential growth in adjusted revenue. The dining out business faced some setbacks in the beginning of the quarter due to restrictions on account of third wave of coronavirus.

Average monthly transacting customers reached an all-time high of 15.7 million. This represents an increase of 0.4 million on a sequential basis.

Meanwhile, the cut in taxes on fuel prices bodes well for Zomato as it reduces delivery costs. The company pointed out that the elevated fuel prices were weighing on the contribution margin as it is not fully passed on to customers. This relief along with other initiatives such as better utilization of the fleet, Zomato aims to achieve double digit contribution margin in the longer term.

Further, with covid cases waning, the management sees a rebound in its growth trajectory. Key monitorable in Zomato’s first investor call include updates on potential Blinkit acquisition. “Zomato’s nearly $1.5 billion of cash reserves (estimated as of March 2022) will suffice till FY2024 even if we assume that it acquires Blinkit for $750 million in cash and further invests to scale it up,” said analysts from Kotak Institutional Equities in a report on 18 May.

The company does not plan to make further minority investments. This coupled with reducing losses will give way to conserving cash. “We have lowered loss estimates with tweaks to our revenue & cost assumptions,” added the Jefferies report. To be sure, increased competitive intensity continues to be a threat. While Zomato stock gave up Tuesday’s initial gains, it is still trading more than 10% up.