Zomato Surges 20% As Loss Narrows, Food Delivery Business Breaks Even Operationally

Shares of Zomato Ltd. surged 20%, the most in two months, on account of its less-than-expected loss, higher order volumes and food delivery business breaking even operationally in the first quarter of this fiscal.

The Gurugram-based food aggregator posted a net loss of Rs 185.7 crore in the quarter ended June against Rs 359.7 crore in the preceding three months, and Rs 262.4 crore estimated by a consensus of analysts tracked by Bloomberg.

Key Highlights (Consolidated, QoQ)

• Revenue up 17% at Rs 1,413.9 crore (Estimate: Rs 1,403.1 crore)

• Operating loss at Rs 307.30 crore (Estimate: Rs 411.6 crore loss)

Zomato said its food delivery business hit an important milestone in the June quarter by breaking even at adjusted Ebitda level. "Our focus on profitability has sharpened over the past few months with the change in market context, without compromising our focus on growth," CEO Deepinder Goyal said.

Separately, the company also plans to change its management structure and install different CEOs for its businesses, a person familiar with the matter told BQ Prime. The parent company would be named 'Eternal' and it will house businesses including Zomato, Blinkit and Hyperpure, according to the company's internal messages reviewed by BQ Prime.

The realignment of the business structure was earlier reported by Moneycontrol and Reuters.

However, the earnings statement released on Monday did not mention any of these changes.

Shares of the company surged as much as 20% to Rs 55.6 apiece and closed at the upper circuit. This is the most the stock has gained since Aug. 25 last year. Still, the stock is still 33% below its IPO price and around 70% below its all-time high.

Of the 19 analysts tracking the company, 15 maintain a 'buy' and two each suggest a 'hold' and a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 76.8%.

Here's what brokerages made of Zomato's Q1 FY23 results.

• Maintains 'negative view' on the stock but may review estimates after the earnings call.

• Results beat estimates on all count, business metrics improving.

• Gross order volume growth was led by robust growth in order volumes and mild growth in average order values as compared to the previous quarter.

• Customer delivery charges (not included in P&L, but gets adjusted at revenue line) grew by 19.6% QoQ. The company expects the order growth momentum to continue in coming quarters led by strong order frequency.

• Management is very bullish on Hyperpure, and said it can leverage its quick-commerce capabilities into this business unit. The company mentioned that Bangalore is already trending toward Ebitda break-even and due to continued improvement in margins owing to economies of scale, operating leverage and improvement in gross margins, it remains confident on achieving 5-10% Ebitda margin overall in a steady state situation in this business.

• Increase in customer delivery charges levied by Blinkit to customers has led to consolidation of multiple orders which results in average order values going up and the frequency coming down.

• The operating metrics are giving strong signals on improvement in unit economics performance. The company has undergone significant measures to reduce the losses which is a healthy sign but could also mean lower growth in coming quarters, which needs to be introspected.

• Has a 'buy' rating with a target price of Rs 100, implying a potential upside of 115%.

• Q1 results suggest that Jefferies underestimated the management's urgency towards profitability, as adjusted operating loss came at a low of Rs 150 crore, with break-even at food delivery.

• Heartening to see this is despite a double-digit QoQ growth in gross order value. Blinkit is also mirroring the trend with strong growth coupled with eye on loss.

• Growth and unit economics improvement was consistent across large and small cities. Efficiency gains outweighed the impact of higher fuel and wage cost inflation, driving contribution margins higher.

• Continuing to drive growth along with loss reduction, with acute focus on a lean cost structure.

• Maintains 'buy' rating at a fair value of Rs 80, implying a potential upside of 9.3%.

• Zomato posted better-than-expected revenue growth of 67% yoy led by monthly transacting user growth of 36% YoY, food delivery GOV growth, higher restaurant commissions and Hyperpure growth.

• User addition is impressive in the light of the fact that advertising and/or discounting does not seem to have increased and Q1 was the first post-Covid quarter with dining-out resuming.

• Costs per order remained flattish sequentially, and the entire contribution margin improvement (~Rs 4.4 per order) was driven by higher revenue per order.

• Zomato’s attempts to accelerate growth while simultaneously aiming to improve profitability in the core business is a positive. Increase FY23-25 revenues estimates by 4-6% on account of higher revenues in Hyperpure.