Zomato share price extend gains on platform fee hike; analysts bullish on stock

Zomato share price traded over a percent higher on Wednesday, extending gains from previous session, as brokerages remain bullish on the stock after the food delivery company increased its mandatory platform fee.

Zomato has raised its platform fee for food delivery services to ₹4 per order from ₹3 in key markets effective January 1, 2024, which analysts believe will drive the company’s EBITDA and aid financial performance.

Zomato started levying a convenience fee of ₹2 per order in August 2023, which subsequently rose to ₹3 per order by end of August. This resultant convenience fee (two months) has been one of the drivers of growth of 60 bps QoQ and 220 bps YoY in the take rate (19.4%, excluding delivery charges) in Q2FY24. 

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The company’s food delivery adjusted revenue too grew 21.8% YoY in Q2FY24 versus 18.5% YoY in Q1FY24. Adjusted EBITDA as a percentage of GOV (gross order value) rose to 2.6% in Q2FY24, up 10 bps QoQ.

Analysts believe every ₹1 rise in fee across markets drives 5% EBITDA upgrade for Zomato.

“We believe the uptick in convenience fee per order will play an important role in improving adjusted EBITDA of Zomato’s food delivery, which stood at ₹2,040 million in Q2FY24,” analysts at Elara Securities said.

The total number of orders for the food delivery business stood at 65 crore in FY23 and the brokerage firm expects orders to reach 83 crore in FY25 and 94 crore in FY26.

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“We believe a ₹1 rise in convenience fee across markets will lead to a positive impact of 1.2% in revenue, 30 bps in the take rate and 5.3% in adjusted EBITDA of its food delivery business. Since the move has been undertaken in select markets, it may lead to a positive impact of a mere 0.5-0.6% during FY25-26E food delivery revenue; subsequently, the take rate too would increase 10-15 bps each in FY25E and FY26E,” said the brokerage firm.

It also expects a positive impact of 2.0-2.5% each in adjusted EBITDA of the food delivery business in FY25E and FY26E, due to the rise in the take rates (assuming this is in half of its markets).

The brokerage retained its Buy rating on the stock with an SOTP-based target price of ₹150 per share.

It has assigned one-year forward EV/EBITDA of 47x to the food delivery business, and one-year forward EV/sales of 6x and 2x to Blinkit and Hyperpure, respectively.

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“Higher convenience fees, advertising income and commission from restaurants are key levers to improve profitability of the food delivery business. Higher ad income and introduction of convenience fee in Q2FY24 had played a key role in improving the food delivery take rate by 220 bps YoY, with ~90 bps expansion from the latter as per our analysis,” it added.

Zomato share price has risen over 23% in the past three months, while the stock has given multibagger returns in one year, surging over 120%, doubling investors’ money.

At 9:40 am, Zomato shares were trading 0.31% higher at ₹129.20 apiece on the BSE.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.