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Home / Markets / Mark To Market /  Zomato’s stock surges as Q1 is palatable but don’t forget the risks
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Zomato Ltd showed improvement on key metrics in the June quarter (Q1FY23) and surprised positively on some fronts. The company reached an adjusted Ebitda (earnings before interest, tax, depreciation and amortization) breakeven in the food delivery business. Overall, the online food delivery company reported an adjusted Ebitda loss of 150 crore, down from 220 crore seen in Q4FY22, beating analysts’ estimates.

Investors were thrilled what with the stock jumping as much as nearly 19% in Tuesday’s morning trade on the National Stock Exchange.

What also added to the optimism is that the average monthly transacting customers rose sequentially by 6.3% to 16.7 million in Q1 after stagnating in the last three quarters. The company expects an increase in this metric to be a larger driver of growth rather than a rise in monthly order frequency. Growth in monthly transacting users would be led by a higher repeat rate of the existing customer base and the addition of new customers.

However, the company is not immune to elevated inflationary trends. While this weighed on demand, margins were also adversely impacted by higher fuel and employee costs. True, Zomato’s contribution margin rose to a multi-quarter high of 2.8%. “Our analysis shows that costs per order remained flattish sequentially, and the entire contribution margin improvement (~Rs4.4 per order) was driven by higher revenue per order," said analysts from Kotak Institutional Equities in a report on 2 August.

Even so, it is worth noting that the contribution margin is still significantly lower than the over 4% levels seen in the second half of the financial year 2021. This was when the pandemic had a meaningful positive influence on Zomato’s performance with a rise in consumers ordering online.

As such, a notable improvement in contribution margin would be a key trigger for the stock, which is 30% down from its issue price of 76 apiece. Despite Tuesday’s appreciation, note that Zomato’s shares are down 61% so far in CY22 owing to investor concerns about the profitability of the company.

Meanwhile, Zomato’s supplies platform for restaurants, Hyperpure continues to report losses at the adjusted Ebitda level. But the losses are declining, which is a positive. Here, the company remarks that the constraint for growth is not demand but the infrastructure, which includes supply chain, warehousing etc. With that being established now, Zomato sees growth in this business.

With respect to Blinkit, which Zomato plans to acquire, it saw a decline in adjusted Ebitda loss in July to Rs93 crore from Rs108 crore in May.

Overall, Zomato’s road to profitability is a rocky one. Multiple concerns persist for the company in the form of regulatory headwinds, sustaining unit economics of the food delivery business in the current inflationary environment, losses in the new business segments (quick commerce - highly fragmented sector, with the presence of large corporate houses), points out Karan Taurani, analyst at Elara Capital (India).

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