Zomato stock rises as Q1, but don’t forget the risks

Investors were thrilled with the stock up nearly 19% in Tuesday’s morning trade on the National Stock Exchange.

Added to the optimism is that average monthly transacting customers grew 6.3% sequentially to 16.7 million in Q1 after remaining stable over the past three quarters. The company expects an increase in this metric to be a bigger driver of growth rather than an increase in monthly order frequency. The increase in monthly transacting users will be driven by higher repeat rate of existing customer base and addition of new customers.

However, the company is not untouched by the rising inflationary trend. While this impacted demand, margins were also adversely impacted by higher fuel and employee costs. True, Zomato’s contribution margin touched a multi-quarter high of 2.8%. Analysts at Kotak Institutional Equities said in a report on August 2, “Our analysis shows that cost per order remained flat sequentially, and the overall contribution margin improvement (~Rs 4.4 per order) was driven by higher revenue per order “

Nevertheless, it is worth noting that the contribution margin is still quite low compared to the level of over 4% seen in the second half of FY21. This was when the pandemic had a significant positive impact on Zomato’s performance along with an increase in consumers. ordering online.

Thus, a significant improvement in the contribution margin will be a major trigger for the stock, which is 30% below its issue price. 76 per. Despite Tuesday’s appreciation, note that Zomato shares are down 61% so far in CY22 due to investor concerns about the company’s profitability.

Meanwhile, Zomato’s supply platform for restaurants, Hyperpure, continues to report losses at the adjusted Ebitda level. But the deficit is coming down, which is positive. Here, the company remarks that the impediment to growth is not demand but infrastructure, which includes supply chain, warehouses etc. With it now established, Zomato sees growth in this business.

With respect to Blinkit, which Zomato plans to acquire, the adjusted EBITDA loss in July declined to Rs 93 crore from Rs 108 crore in May.

Overall, Zomato’s road to profitability is rocky. There are several concerns for the company such as regulatory headwinds, sustaining unit economics of the food delivery business in the current inflationary environment, losses in new business segments (Accelerated Commerce – highly fragmented sector with presence of large corporate houses), Elara Capital ( India) analyst Karan Taurani explains.

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