Zomato- Losses increase but a potential upside of 37% expected?

The company has reported a higher than expected revenue growth of 140% YoY with a major push from the food delivery business. Zomato witnessed a higher than expected EBITDA loss of Rs.3.1 billion in Q2 FY22 which is a huge leap from the Rs.1.7 billion loss in Q1 FY22. This loss has been attributed to a lower contribution margin which fell from 2.8% in Q1 FY22 to 1.2% in Q2 FY22, and higher spending on ads. The company reported a Net loss of Rs.435 crore in Q2 FY22 versus the Rs.230 crore loss reported in Q2 FY21.

Increase in loss can be due to the following reasons:

1. Increased investments in the food delivery sector

2. Higher spending on branding and marketing to increase the customer base. The amount spent increased by Rs.0.4 billion QoQ

3. Unpredictable weather and fuel costs have increased the delivery costs by Rs.5 QoQ.

The food delivery business has witnessed a huge growth of 158% YoY and it contributed to 83% of the reported revenues. The dine-out segment of the business has remained a drag on the resources even in this quarter whereas the hyperpure business has seen a rapid upscale of 49% QoQ.

After a hiatus of 2 years, the company has started food delivery services in emerging cities. Even though the demand is not very high, once the customers try restaurant food and the habit sinks in, the sky is the limit. This will lead to more and more restaurants opening up to meet the demand of the customers and in-turn increasing the company’s business substantially. To support this point, Zomato has noticed a 30% increase in order frequency in cities where the number of restaurants are more.

Zomato has been on an investment spree over the last 6 months. It invested $100 million in Grofers in early August,2021. The total investment now stands at $275 million. Currently Zomato is in the process of selling Fitso to Curefit for a whopping $50 million. Another $50 million will be invested in cash, in Curefit to acquire a 6.4% shareholding. Zomato also plans on investing $75 million in Shiprocket for an 8% stake. Final documents have been signed for a 16% stake in Magicpin for $50 million.

The revenue estimates have been increased to 14-15% for the period of FY22-24. Analysts expect Zomato to be good for the long term given its high growth rate and thus retain a BUY call with a price target of Rs.170. Morgan Stanley and Goldman Sachs have set their price target as Rs.185 as they believe that the second quarter was driven by a strong user acquisition.