Zomato lands in a sweet spot after remarkable recovery

Apart from in food delivery, Zomato has performed well in its quick commerce and restaurant supplies businesses as well. (Reuters)
Apart from in food delivery, Zomato has performed well in its quick commerce and restaurant supplies businesses as well. (Reuters)

Summary

The company’s stellar third-quarter results confirm anecdotal evidence about a consumption rebound in certain segments of the economy.

Food-delivery service Zomato actually has several other revenue streams and significant ‘other Income’. While the company has done well to tighten operations to improve margins, revenue growth–more orders, more users–depends on consumption.

Excellent third-quarter results with high growth confirm anecdotal evidence about a consumption rebound in certain segments of the economy. There are more orders, more users, and more restaurants in the food-delivery segment. This is also feeding into stronger growth in Hyperpure, Zomato’s restaurant supply business. 

Zomato has gained market share in quick commerce, partly due to the weakness of a main competitor and partly because it has clawed market share from unorganised retail in small towns. 

Zomato does quick commerce through Blinkit, which it acquired in 2022, while Hyperpure supplies produce from farm to restaurants. Plus, there’s advertising revenue from restaurants, and dining-out revenues. 

In addition, the cash stash (money raised from Zomato’s IPO and its venture capital funding that has not yet been invested) earns over 200 crore in revenue per quarter, so treasury operations are also important.  

Total revenue grew to 3,288 crore in the December quarter from 1,948 cr in the corresponding year-earlier period, and from 2,848 crore in the preceding September quarter. 

Zomato also swung to an Ebitda profit of 51 crore in the third quarter, from an Ebitda loss of 366 crore in the same year-ago period, and an Ebitda loss of 47 crore in the second quarter of this fiscal year. 

Zomato’s other income (treasury contribution) increased to 218 crore in the third quarter, from 173 crore a year earlier, and 212 crore in the second quarter. 

And finally, Zomato reported a profit after tax of 138 crore for the third quarter, swinging from a loss of 346 crore a year earlier. Even when compared with the second quarter of this fiscal year, when Zomato registered a profit after tax of 36 crore, this is a significant jump.

Zomato’s turnaround is driven by better ad-monetization, the calculated hiking of platform fees, and better cost efficiencies. The food-delivery business saw gross order value improve by 6% from the September quarter, and by 27% year-on-year. 

The number of monthly transacting users, or MTU, grew 2.2% quarter-on-quarter to 18.8 million. Zomato’s Gold membership program contributes over 4 million to MTU, so there’s stickiness. 

The company’s monthly active restaurant base grew 20% year-on-year in the third quarter due to new restaurants opening up. Zomato hiked its platform fee to 4 per order in January 2024 from 3 earlier. 

Apart from these metrics, there are two important accounting ratios that can help us assess profitability for services like Zomato. One is take rate, and the other is contribution margin. 

Take rate is the total amount Zomato makes from each order. Its take rate (including delivery charges) declined by 20 basis points to 23.9% due to lower delivery charges. 

Contribution margin is the amount Zomato makes per order after deducting variable costs. Its contribution margin rose by 50 basis points quarter-on-quarter to 7.1%.

In the quick commerce segment, Zomato’s gross order value was 3,500 crore in the December quarter, up 28% from the September quarter and up 103% year-on-year, led by stronger MTU and higher order frequency. 

Contribution margin in Blinkit rose to 2.4% in the third quarter from 1.3% in the preceding three months. Blinkit intends to increase store density with plans for 100 dark stores this financial year. The number of days for a dark store to hit 1,000 orders per day reduced to 2 months in the December quarter, from almost 6 months in the March quarter of FY23.

Zomato’s quick commerce revenue hit 644 crore in the third quarter, with volumes boosted by the festival season. The company feels improved inventory management and tighter delivery logistics helped maximise returns. 

Rival Dunzo is currently suffering a cash crunch, which means faster market share gains for Zomato. 

In addition, Hyperpure’s revenue in the third quarter grew 15% quarter-on-quarter, and 104% over a year earlier, to 860 crore. 

Zomato has projected a 4.8% increase in food-delivery orders for the fourth quarter, helped by a 4% jump in gross order volume. The take rate may rise to just above 24%. 

In quick commerce, orders are expected to hit 64 million, up from 56 million in third quarter. GoV in quick commerce is expected to hit 4,070 crore with contribution margin of 4.1%. Importantly, Ebitda breakeven in the quick commerce business is expected by the April-June quarter. 

Through FY25 and FY26, food delivery is likely to see GOV growth of 18%-plus annually, with a rise in contribution margin to about 7.5%. In quick commerce, by FY27 or FY28, GOV is expected to exceed that for food delivery. 

That Zomato has achieved quick commerce penetration into tier 2 and 3 towns will help it quickly grab market share versus unorganised retail. 

Breaking even in quick commerce, and profitability in food delivery and Hyperpure are very welcome. Zomato has a cash stash of over 11,700 crore, which means it may invest judiciously. 

The company faces a tax demand of about 400 crore levied on the cash it collected on behalf of delivery partners. Zomato is disputing this demand, and the case is likely to lead to years of litigation. But in the worst case, Zomato has the reserves to meet the GST demand.

The consumption rebound is crucial for Zomato’s growth. The promise of high growth coupled with market share gains has led to a string of ‘Buy’ recommendations from analysts for Zomato.

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