Zomato needs its pot of gold

The slowdown in the third quarter was due to factors such as weakness in the mid-market segment and growth in eating out. This has resulted in a gradual decline in order volume and average monthly transacting users (MTU). Both these factors should worry investors.

Zomato is hopeful that the slowdown will end, it said in the earnings call on Friday. But how the demand unfolds here remains to be seen. Efforts are on to revive growth. The launch of the membership program, Zomato Gold, in late January is a significant initiative. The success of Zomato Gold will go a long way in reviving growth. Partly because of this, Zomato’s app opens have increased in the last few weeks. The company noted that the absence of such a program had an adverse impact on the previous quarter.

“We believe the declining orders/MTU metrics clearly suggest that a large portion of consumer adoption is incentivized,” said analysts at Daulat Capital Markets. ,

However, the program will depend on near-term profitability due to free delivery to Zomato Gold members on orders that meet certain criteria. However, the extent of impact needs to be monitored as the company expects to negate the headwinds through growth in other revenue and cost optimization measures. Some analysts say the program is likely to delay continued improvement in contribution margin.

Add to this, Zomato’s strategy to exit non-performing markets in the food delivery business helps. In January, it stopped catering to about 225 smaller cities that contributed 0.3% of GOV in Q3 because these areas weren’t attractive enough.

Against this backdrop, Zomato has maintained its guidance of reaching 4-5% adjusted EBITDA as a percentage of GOV in the food delivery business over the medium term. In Q3, cost efficiency measures imply that profit metrics were relatively better. The food delivery business witnessed an increase in contribution margin and also turned positive at the adjusted EBITDA level.

Overall, Zomato reiterated its guidance of becoming adjusted EBITDA break-even by Q2FY24, excluding instant commerce arm, Blinkit. In January, the company was break-even at the adjusted EBITDA level and notes it is likely to achieve this in Q4FY23 but hinges on proper execution of its plans. Blinkit’s losses narrowed in Q3 and GOV was up 18% sequentially. However, this business is the main culprit of Zomato’s overall mounting losses. In Q3, Zomato’s adjusted EBITDA loss was 265 crores with Blinkit’s loss share at 85%. On the other hand, Blinkit’s revenue share was only 13%.

“We believe the segment is highly fragmented with high discounts and achieving profitability in the near to medium term could be a challenge,” said Karan Taurani, analyst at Elara Securities, who will also keep Zomato’s valuation under check. ” India).

To be sure, meeting the guidance will be a key catalyst for the stock, with demand green shooting up in the food delivery business. Besides, continued improvement in Blinkit’s metrics will help investor sentiment. Currently, Zomato shares are down 30% from their issue price 76 during the IPO in 2021.