Here’s Why Kotak Sees Zomato Making A Bull Run

A month after foodtech giant Zomato started levying a platform fee of INR 2, and later increased it to INR 3 for some users, Kotak Institutional Equities has said the fee will increase the company’s customer take rate and contribution margin.

“On the app, Zomato says, ‘This small fee helps us pay the bills so that we can keep Zomato running.’ We note that over the past few quarters, bulk of the take-rate improvement has been driven by a restaurant take-rate increase and delivery take-rate has lagged,” the analysts at the brokerage said.

“The company’s intent seems to be to monetise select customers better, resulting in an increase in customer take-rate, which flatlined over the past few quarters,” said the analysts.

In simple terms, the take rate is the commission that Zomato charges from restaurants and customers for facilitating an order.

Early last month, Zomato began charging a platform fee of INR 2 per order for select users on its platform, mirroring the move of its rival Swiggy. Within a few week, Zomato increased the platform  fee to INR 3 for some customers in certain cities.

In response to Inc42’s queries on the matter, a Zomato spokesperson said that the platform fee would be applicable to all customers but the changes are still in the experiment stage and are being rolled out gradually across the country.

Giving a calculation of how the platform fee could increase Zomato’s margin, Kotak said the company reported 2.7 Mn high-frequency customers in 2022 with annual ordering frequency of more than 50. Assuming these customers transact 75 times a year on average, an INR 2 per order platform fee on all these orders would result in INR 40.5 Cr of incremental contribution to profit/EBITDA. 

The analysts said this would also imply about a 16 basis points (bps) increase in contribution margin, helping Zomato move towards its targeted 8% margin (as % of GMV) over the medium term.  

The contribution margin of Zomato’s food delivery business stood at 6.4% in Q1 FY24. 

Reiterating its ‘buy’ rating on Zomato, Kotak raised the fair value of the stock to INR 110 from INR 105 earlier, implying an upside of 12% to its last close.

Besides, Kotak also said that if Zomato increases the scale of business and control of overheads in its ecommerce business, Blinkit, and B2B business, Hyperpure, these segments can also achieve profitability over the next few quarters.

Zomato reported a net profit of INR 2 Cr in Q1 FY24 with an operating revenue of INR 2,416 Cr.

Shares of Zomato ended Tuesday’s session marginally higher at INR 98.2 on the BSE.

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