Zomato’s financials for FY18 encouraging, Morgan Stanley rates it ‘overweight’

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Published: April 9, 2018 12:12:06 AM

Zomato released its key financials and metrics for FY18; we find these encouraging and believe that if momentum continues, the company could be well on course to achieving or beating our estimates.

Zomato, Zomato revenue, Morgan Stanley, food ordering, zomato food orderingZomato released its key financials and metrics for FY18; we find these encouraging and believe that if momentum continues, the company could be well on course to achieving or beating our estimates.

Zomato released its key financials and metrics for FY18; we find these encouraging and believe that if momentum continues, the company could be well on course to achieving or beating our estimates. Total revenues in FY18 at $74 mn (MSe of $73 mn), implying growth of 45% y-o-y As per company, its annualised revenue run rate is currently $100 mn and its March revenue is 35% higher than January’s. Company believes that if momentum continues, it will be recording one of its best years in business. With this exit rate and momentum in business, our FY19 revenue forecast of $125 mn appears to have more upside risks than downside risks.

Shortfall in food ordering revenues in FY18, but exit rate very strong: 30% of revenues came from food ordering (vs 18% in FY17), implying revenues of $22 mn+ (vs MSe of $25 mn). However, exit rate of monthly food orders in March was 5.5 mn (vs 5.8 mn average assumed for FY19). Food ordering is live in 15 cities in India and five cities in the Middle East. Runnr now delivers 60% of the food orders generated on Zomato’s platform.

Advertising business should see improvement in growth next year: Despite lack of focus (ad sales team is down 20% y-o-y since last year) in FY18 (as company was focused on building the transaction business), advertising revenues grew 20% y-o-y in FY18 (with 15k paid restaurants). Company has started investing in this business in the last month and this could result in better performance, we think.

Burn rates came down in FY18, but trends for Feb-Mar 2018 suggest company is in investment mode

Operating burn in FY18 was $11 mn (vs $15 mn in FY17 and our estimate of $12 mn). Out of total burn in FY18, company incurred $6 mn in the months of Feb-March 2018 when it decided to focus on growth. We expect burn rates to increase over the next two years.

New revenue streams could emerge and help growth rates

As of March 31st, company had total of 280k active user subscriptions for its two programmes (Zomato Gold and Zomato Treats). As per company, Zomato Gold now contributes 12% of its monthly revenues, and it is planning to take this programme to additional cities and expand the membership base.

Valuation

Our price target of Rs 1,900 for Info Edge is derived from a probability-weighted sum-ofthe-parts analysis: standalone business and value for investee companies.

o We value the standalone business based on discounted cash flow methodology (DCF). We have assumed a WACC of 15% and a terminal growth rate of 5%. We value the standalone business at Rs 1,028/share in our base case, Rs 1,794/share in our bull case, and Rs 460/share in our bear case. Adding cash (current cash and cash from stake sale in Zomato of $50 mn), the values come to Rs 1,175/share (base), Rs 1,941 (bull), and Rs 607/share (bear).

o We value most of the investee companies based on valuation assigned in their latest funding round.

o For Zomato, however, we use our own value based on our long-term assumptions. We built a 10-year model for Zomato and assign it a base case value of $2.5 bn. Given our expectations of $45-50 mn burn rate over next 3 years, we believe Zomato may need to raise funds. We have assumed that Info Edge does not participate in any potential large funding round and have assumed dilution of Info Edge’s stake in Zomato (taking its stake down to 30.91% in base case).

o We assign a total value of Rs 480/share for the investee companies in our base case. We value investee companies at Rs 793 in our bull case and Rs 253 in our bear case scenario. We maintain probability weights of 60% for the base case, 30% for the bull case, and 10% for the bear case scenarios. Our higher base case weighting reflects conviction in our base case numbers and likelihood of a pick-up in revenue growth. We have assigned a higher bull case weighting relative to the bear case, since we believe that with a pick-up in macroeconomic growth and with one-off factors behind Info Edge, growth rates could surprise on the upside rather than the downside. We still see potential for the bear case scenario to develop in view of a macroeconomic slowdown that could affect recruitment business growth and margins; potential increase in competitive intensity in real estate and recruitment; and fund raising for investee companies at lower valuations, driving down per share value for Info Edge.

 

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