Here’s Why JM Financial Sees Another Muted Quarter For Zomato’s Food Delivery Segment

Zomato’s sequential growth in food delivery gross order value (GOV) will likely remain muted for the third consecutive quarter in the fourth quarter (Q4) of the financial year 2022-23 (FY23) due to continued inflationary pressure, said JM Financial in its latest research note.

Besides the macroeconomic factors, Zomato’s growing share of dining out and aggressive focus on improving its overall profitability would further impact the growth in this major vertical, the brokerage added.

The report comes ahead of Zomato’s Q4 FY23 results. Zomato’s GOV for its food delivery segment had grown only 0.7% sequentially in the prior quarter (Q3 FY23). However, during the quarterly financial disclosure, Zomato reiterated that the company would achieve a full EBITDA break-even, minus the quick commerce business Blinkit, by Q2 FY24 or earlier.

While JM Financial analysts now expect the foodtech major’s food delivery segment to grow at a compound annual growth rate (CAGR) of about 21% between FY23 and FY27 as against its earlier estimate of about 25%, they remain upbeat about the company’s overall profitability and long-term growth.

The brokerage said that the impact of growth moderation will be broadly offset by better profitability in the business.

“Relaunch of the ‘Gold’ loyalty membership and closure of operations in 225 cities suggest the company sees high long-term value creation potential by mining high-quality customers (those whose ordering frequency is very high), rather than investing in expanding the long-tail of customers ordering infrequently,” the brokerage said, maintaining a ‘buy’ rating on the stock.

However, it said the strategy comes with duality. While on the one hand, it could accelerate profitability expansion, on the other hand, it could also have an adverse impact on the near-term monthly transacting users (MTU) trend amid weak macros.

In fact, the Zomato Gold membership, which was relaunched by the end of January last year, was expected to have some short-term negative impact due to the free delivery benefits. But the startup said that such adversities would be offset by improvements in other revenue and fixed and variable cost drivers. 

Zomato has also been aiming at making the Gold programme profitable by itself.

Meanwhile, Zomato’s net loss widened to INR 346.6 Cr in Q3 FY23, both on a year-on-year (YoY) and sequential basis. Amid an aggressive focus on becoming a profitable entity and improving food delivery growth numbers, reports emerged recently that the foodtech giant was seeking a 2%-6% hike in commissions from partner restaurants.

JM Financial noted that Swiggy’s take rates for its restaurant partners on average are relatively higher than that of Zomato by about 200 basis points (bps), which the latter is now attempting to narrow. And the recent hike in commission rates was probably a step in that direction, the brokerage said. 

JM Financial has a target price of INR 100 on the stock, which implies an upside of 85% to its last close. Zomato closed at INR 53.97, up 3.5% on the BSE.

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