Zomato Ltd shares are down 18% from its issue price 76 per share and sentiments about the stock are unlikely to improve unless there are meaningful signs of a turnaround in profitability. This is despite the food delivery company performing well in some respects in the March quarter (Q4FY22), especially on improving its disclosures.
Average Monthly Transaction Users (MTU) reached an all-time high of 15.7 million in the fourth quarter. However, this metric has remained around the same level for the past three quarters.
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Management said in its first earnings call that the company will aim to increase the frequency of ordering to drive growth. This would be a long order as the ordering frequency of existing customers can only increase up to a certain limit. In addition, adding new customers will continue to be important.
“Focusing on frequency on new users may cause some concerns, but we note that MTU (about 30% of users who transact annually) will still increase,” analysts at Jefferies India said in a report on May 24.
According to the management, there is some scope for this measure to grow as the annual order frequency is around 10x per user.
The company said that about 90% of its food delivery business comes from repeat customers. Also, new users are being acquired systematically. This means lower customer acquisition costs, which is good for profitability. In FY22, Zomato had positive contribution gains in 120 of the top 300 cities. Other initiatives like reduction in fuel taxes and better fleet utilization will support Zomato’s objective of achieving double digit contribution margin in the long run.
The road ahead is difficult. “We believe revenues are likely to double over the next three years (FY25), which means they will reach $1.2 billion. However, the valuation will not see significant re-rating unless there is a spike in contribution margin/unit economics or some visible change in an emerging business (hyperpure or quick commerce),” said Karan Taurani, analyst at Elara Capital (India). Said. In a note, Hyperpure is Zomato’s supply platform for restaurants.
The company intends to invest $400 million in Accelerated Commerce during CY22-23. This is at a time when it is already making losses and the path to profit is not clear. “The obsession with becoming hyper-local signals the Blinkit deal is imminent, which will bring a new stream of pitfalls and uncertainty,” the Jefferies report said.
Meanwhile, rising yields and market volatility have prompted analysts at JM Financial Institutional Securities to raise the weighted average cost of capital from 12% to 13%, leading to an increase in the revised discounted cash flow-based target price. 115 vs 140 before.