Zomato gains 2% after Q4 loss narrows, boosts hopes of profitability

Nomura has maintained its sell rating on the stock and kept its target price unchanged at Rs 45, down 30 percent from its current market price.

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Shares of Zomato Ltd gained nearly 2 percent on May 22 after the losses narrowed in Q4 and the company said it hopes to post profit within the next four quarters.

The stock hit a high of Rs 66.16 on the BSE, up nearly 2 percent from its Friday’s close. At 9.30am, the stock was trading at Rs 65.29 on the BSE, up 1.16 percent from the previous close, while the benchmark Sensex edged up 0.16 percent to 61,830 points.

On May 19, Zomato reported that its consolidated net loss for the fourth quarter narrowed to Rs 188.2 crore from Rs 359.7 crore last year. Its revenue from operations jumped 70 percent to Rs 2,056 crore from Rs 1,211.8 crore a year ago.

The Zomato management guided for positive-adjusted EBITDA and profit on a consolidated basis (including quick commerce) within the next four quarters, and plans to achieve this through profit growth in the food delivery business and loss reduction in Blinkit.

“Zomato is targeting a company-level EBITDA breakeven in the next four quarters, which is encouraging,” Kotak said in its report.

Brokerage firm Jefferies India said Zomato has successfully achieved its promised adjusted EBITDA breakeven (excluding Blinkit) within the expected timeframe (March to September). Despite challenging macroeconomic conditions impacting growth, the management has prioritised profitability and demonstrated a sense of urgency, even with the launch of the Gold programme.

Positive signs of improvement are emerging, with expectations of high single-digit growth in gross order value for the first quarter. The most significant takeaway is the company’s objective to achieve consolidated adjusted EBITDA breakeven and profit after tax (PAT) within the next four quarters. Jefferies recommends buying Zomato and maintains a target price of Rs 100 per share.

“The superior Q4 performance bolsters our belief in Zomato’s ability to execute and deliver profitable growth. Improvement in consumer sentiment is expected to drive GOV/MTU growth,” said Emkay in its latest report. The brokerage maintained ‘buy’ rating and kept the target price at Rs 90 a share.

Many brokerages remained cautious amid falling gross order value and average monthly transacting users. Nomura has maintained its ‘sell’ rating on the stock and kept its target price unchanged at Rs 45, down 30 percent from its current market price. Kotak has maintained its ‘buy’ rating and kept the price target unchanged at Rs 82 a share.

Dolat Analysis & Research Themes maintained its ‘sell’ rating on the stock and decreased its target price by 7 percent to Rs 60 a share.

Zomato’s food delivery business witnessed a 1 percent decline in gross order value in the March quarter, amounting to Rs 6,569 crore. This reduction can be attributed to both an industry-wide slowdown and Zomato’s withdrawal from 225 cities in the previous quarter. The average monthly transacting users (MTUs) also decreased from 1.74 crore to 1.66 crore sequentially.

Zomato clarified that this decline was primarily due to the removal of unprofitable customers in the bottom percentile and stated that MTUs will not decrease further. Analysts predict that despite the growing popularity of Zomato Gold, factors such as weakening demand, increased dining-out activities, and heightened competition will constrain MTU growth.

Zomato’s contribution margin (CM) for the March quarter stood at 5.8 percent, surpassing analysts’ expectations of 5.2 percent. This improvement was primarily driven by effective cost optimisations. Analysts believe that the contribution margin is unlikely to decrease unless Zomato resumes aggressive discounting practices.

“We believe that declining Order/MTU metrics clearly suggest that a large part of consumer adoption is incentivised and thus slipped as quickly as discounts withdrew. Weakening growth and increased competition would delay the optimisation plans and do not add to our confidence on major turn-around,” said Dolat Analysis & Research Themes in its latest note.

Brokerage firm Nomura has revised its growth assumptions for Zomato’s food delivery business. It lowered the estimate for gross order value (GOV) growth from 20 percent to 17 percent. It, however, raised its contribution margin estimate for FY24F from 5.8 percent to 6.5 percent.

The firm believes that in order to achieve the target of a 4-5 percent EBITDA margin as a percentage of GOV, Zomato will need a 7-8 percent contribution margin, which is expected to take at least 2-3 years. Nomura maintains its belief that Zomato will face challenges in achieving a double-digit contribution margin while sustaining high growth in the long term.

“We factor in a weaker FD business outlook and stronger Q-commerce growth, and higher CM margin in food delivery leading to a lower EBITDA loss in FY24. Achieving high GOV growth and strong CM improvement in core FD business remain challenging, in our view. Key risks: stronger-than-expected GOV growth in FD business and quicker break-even in Q-commerce,” Nomura said in its latest note.

Kotak Institutional Equities, a brokerage firm, has reduced its revenue estimates for Zomato’s food delivery business for the fiscal years 2024-2025. The downward revision, ranging from 5 percent to 11 percent, is primarily attributed to the slow growth within the industry, a modest 2 percent year-on-year increase in average order value (AOV) annually, and a higher contribution margin. In its latest note, Kotak stated that while it has revised its EBITDA forecasts upward, it anticipates more moderate growth in the food delivery segment over the medium term.