Zomato a long-term play, expected to post 36% revenue CAGR over FY23-25

Zomato share price NSE, Zomato Q4 results: The Street seemed impressed with Zomato's March quarter results (Q4FY23) wherein the food delivery platform reported a narrowing of its losses to Rs 187.6 crore against Rs 359.7 crore loss registered in the March 2022 quarter. Its consolidated revenue from operations grew to Rs 2,056 crore from Rs 1,211.8 crore logged in the year-ago period. Moreover, Zomato turning EBITDA positive (excluding Blinkit) in the quarter and management's commitment to turn both adjusted EBITDA and PAT positive on a consolidated level (including Blinkit) by 4QFY24, have analysts bullish.

The biggest highlight of the quarterly results was that its core business turned profitable in Q4, with adjusted EBITDA of Rs 28 crore against a loss of Rs 39 crore in 3Q. Motilal Oswal notes that the profitability was mainly driven by the food delivery business whose adjusted EBITDA grew to Rs 78 crore (from Rs 23 crore in 3Q), which, in turn, was driven by a strong contribution margin (5.8 per cent as a percentage of average order value vs. 5.1 per cent in 3Q) and operating leverage (fixed cost as a percentage of the gross order value of 4.6 per cent vs. 4.7 per cent in 3Q).

"We expect food delivery profitability to continue to improve at a healthy rate on the back of continued improvement in take-rate, lower delivery cost, re-pricing of Gold membership and operating leverage," Mukul Garg, a research analyst with Motilal Oswal, wrote in an earnings review note, co-authored by Raj Prakash Bhanushali and Pritesh Thakkar.

The brokerage further said that it expects Zomato to report a strong 36 per cent revenue compound annual growth rate (CAGR) over FY23-25, given its dominant market share and strong growth in the food delivery business and Hyperpure. It further expects the company to break even in 4QFY24, in line with the management guidance. Motilal Oswal believes that the food delivery business is still at a nascent stage in India with a long runway for growth."We maintain our BUY rating with a TP of Rs 80, implying 24 per cent potential upside," the brokerage adds.

JM Financial Research shares similar views. In its words, "We continue to remain bullish on the company’s long-term growth prospects in the hyperlocal delivery space as we believe it is well positioned to benefit from robust industry tailwinds such as improving tech penetration and rising income share of digitally native millennials / GenZ. The balance sheet remains strong with net cash of Rs 113 billion as of Mar’23. "

The brokerage firm values the consolidated business using a 15-year DCF to arrive at a Jun’24 FV for Zomato of Rs 105 (vs. INR 100 earlier). "Implied FY26 PER (price-to-earnings) ratio on our TP works out to ~63x while the stock currently trades at c.39x," it adds. Discounted cash flow or DCF refers to a valuation method that estimates the value of an investment using its expected future cash flows.

STOCK PRICE

At the time of writing this news, the stock was trading 0.40 per cent higher at Rs 64.80 against the previous day's close of Rs 64.54. During the session, the scrip hit a high of Rs 66.85 and a low of Rs 64.28. In the past one year, the shares have rallied 13 per cent from Rs 57.05 to Rs 64.50, Trendlyne data show.

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