SUMMARY
ICICI Securities said that the change in Blinkit’s delivery fee structure indicates Zomato’s efforts towards cost control and will help it increase the delivery radius for its existing dark stores
Despite the strike of the driver partners, the brokerage expects Blinkit to grow 30% quarter-on-quarter in Q4 FY23, led by an increase in geographical reach
Motilal Oswal also initiated its coverage on Zomato with a ‘buy’ rating and a price target of INR 70, implying an upside of 30% to the stock’s close on Friday
The strike of Blinkit’s delivery executives in Delhi-NCR since mid-last week is likely to have already resulted in approximately 1% revenue loss to the quick-commerce arm of Zomato in Q1 of the financial year 2023-24 (FY24), ICICI Securities said in a research note on Monday (April 17).
Over 50% of the 200 Blinkit dark stores in the region have remained shut since the strike started over the company introducing a new pay structure for delivery partners from April 12.
“We estimate Blinkit was operating about 370 dark stores pan-India as of Q3 FY23. This implies almost 25% of the dark stores are currently not operational. Given that at least 3-4 days’ sales have already been lost, this implies about 1% loss in revenue from Blinkit and almost 0.15% of consolidated revenue for Q1FY24 – already,” said ICICI Securities note on Zomato.
After the strike started, a message on the Blinkit app in some areas of the national capital said: “Sorry for the inconvenience. Your store is under maintenance.” Later, in a statement to Inc42, the startup said, “We have introduced a new payout structure for our partners that compensates them based on their effort to deliver an order. This is an opt-in exercise, and our teams are on the ground to answer any questions from the partners.”
The pay structure change, under which Blinikit has slashed the delivery fees of its delivery executives, comes at a time when Zomato is aggressively focusing on achieving its profitability goals. The foodtech major has already taken several restructuring efforts in its other business segments, including layoffs and exiting food delivery business in several cities.
ICICI Securities said that the change in Blinkit’s delivery fee structure indicates Zomato’s efforts towards cost control. The brokerage is of the opinion that the change would allow Blinkit to increase the delivery radius for its existing dark stores and improve its network coverage with limited capex spending.
“We believe strikes/agitations are unavoidable in the sector given the large exposure to an urban ‘blue-collared’ workforce. However, given that the strike (at Blinkit) is happening in the national capital and has already garnered political attention, we think the company should try to resolve the issue at the earliest,” said the brokerage.
In fact, soon after the protest erupted, Yashpal Batra, a Bharatiya Janata Party (BJP) spokesperson from Haryana backed the protesting Blinkit delivery executives and met Gurugram Labour Commissioner Dinesh Kumar to seek immediate redressal of their grievances. Today, the delivery executives met Kumar and demanded a minimum pay of INR 25 per order delivered.
ICICI Securities believes that the startup can resolve the issue through a combination of clearer communication on the expected change in earnings for delivery executives and/or some concessions on the delivery fee.
Despite the near-term growth challenges being faced by Zomato in its food delivery segment, with the fresh problems at Blinkit adding to the woes, ICICI Securities maintained its ‘buy’ rating on the stock.
The brokerage expects Blinkit to grow 30% quarter-on-quarter in Q4 FY23, led by an increase in geographical reach. On the other hand, it estimates Zomato’s food delivery gross order value (GOV) to remain flat sequentially in the quarter despite Zomato Gold activation, due to seasonally weaker quarter and online consumption fatigue.
It must be noted that Zomato’s consolidated net loss widened on a year-on-year (YoY) as well as on a QoQ basis to INR 346.6 Cr in Q3 FY23, with total adjusted revenue of INR 2,363 Cr. Blinkit contributed INR 301 Cr to adjusted revenue in the quarter.
ICICI Securities has also maintained a price target (PT) of INR 65 on Zomato, implying an upside of 20.7% to the stock’s last close on BSE.
Meanwhile, Motilal Oswal initiated its coverage on Zomato today with a ‘buy’ rating and a PT of INR 70, implying an upside of 30% to the stock’s Friday’s close.
Motilal Oswal in its report said that though Blinkit is scaling up well and improving on profitability, the space is still nascent for Zomato given a large number of players in the ecosystem.
“We view the acquisition of Blinkit as an additional risk and high attrition at senior management level remains a concern,” the brokerage said.
However, it also forecast Zomato to report a 29% revenue CAGR over FY23-25 as the food delivery industry in India is set to grow rapidly in the medium-term, driven by intensifying internet penetration, rising consumption, and growth in urbanisation. Zomato, as a dominant player in the industry, will benefit from this.
“We expect strong growth to be complemented by the company turning profitable over FY25, despite elevated competitive intensity,” the brokerage added.
While most other new-age tech stocks fell on the stock exchanges today, shares of Zomato were trading almost flat at INR 53.8 on the BSE in the noon trade.
