Zomato's recipe for success: Blinkit's performance steals the spotlight

In Q3, Blinkit’s gross order value (GOV) grew 28% sequentially thanks to festive tailwinds. While most of the growth was volume-led, a rise in the average order value also helped. 90% of Blinkit’s GOV originates from the top eight cities, highlighting significant acceptance. Moreover, the average time taken for new stores to reach 1,000 orders per day dropped to two months in October from 5.8 months in Q4FY23. Little wonder, its shares rose 6.5% in the past two trading sessions following Q3 results, scaling to a new 52-week high of ₹151.40 on Friday.

True, Blinkit is still in the red, but its losses are narrowing. In Q3, a tough macro environment influenced the metrics of its food delivery business with the GOV growing 6.3% sequentially or 27% year-on-year to ₹8,486 crore, a shade lower than expectations, but better than quick service restaurant operators. Contribution profit as a percentage of GOV rose by 50 basis points sequentially to 7.1% in Q3 thanks to improving advertising revenue and the introduction of platform fee. Contribution profit is a profitability measure and calculated as revenue minus variable costs. Zomato Gold was a drag on margins, owing to a drop in the pricing of its loyalty programme. The company is yet to get to a sustainable pricing on this front, and is currently using the programme to acquire customers amid intensifying competition.

Zomato expects its food delivery GOV to grow by over 20% year-on-year, but “in the food delivery business, most of the positives in terms of growth rate and margin improvement are largely priced in," said Karan Taurani, an analyst at Elara Securities (India).

Overall, its consolidated adjusted revenue (operating revenue plus actual customer delivery charges in the food delivery business) is expected to grow by over 50% year-on-year, compared to the earlier estimate of 40%. Here, Blinkit is likely to do some heavy lifting. In Q3, its consolidated adjusted revenue grew by nearly 53%.

To be sure, investors are sitting on handsome returns with the stock gaining 175% over the past one year, reflecting the solid earnings delivery. Hereon, an expansion in Zomato’s valuation hinges on Blinkit turning profitable. “While Blinkit, once profitable, can command premium profit multiples to food delivery business, as it is relatively more sticky and a play on retail commerce (bigger total addressable market and longer growth runway), for the time being we value it at 2 times FY26 GOV," said analysts at JM Financial Institutional Securities in a report on 9 February.

While Q4 may see some moderation in food delivery GOV growth rate, Blinkit is expected to continue its strong momentum. Major hiccups in Blinkit’s path to profitability would be unwelcome.