Zomato’s growth in the next two years is expected to come from increased frequency rather than new users. While this may raise some concerns, also in the context of near-flat monthly transaction users (MTUs) in the past three quarters, the management intends to see a higher conversion from ATU (50m) to MTU (15m). Current ATU annual frequency is 10x, but there are 1.8m users with 50x. In this context, it is useful to note that in its 3QFY22 call, the Nykaa management also stressed on a similar strategy of prioritising conversions of active customers into transacting ones.
Delivery cost: Over time, the order density in a catchment area should rise as the number of customers and restaurants increases, which, in turn, will reduce delivery radius, lowering delivery costs. The company intends to pass on some part of the savings to delivery partners, which should help improve their compensation and still be a net positive for Zomato.
Profitable growth: The Zomato management believes growth need not come at the cost of profitability, and acute cost focus in food delivery, along with continued growth momentum, would drive profitability. The need for discounts has been going down and overheads are likely to trail growth in revenue. There is further potential to increase take rates, which should help lower losses or improve profitability. We have a ‘Buy’ rating on Zomato with price target at Rs 100.
Conserving capital: Zomato targets to turn its core food delivery business profitable, with break-even in the foreseeable future, conserving most of its $1.6 billion in cash. There are no plans to commit any further capital for minority investments, whether new or even existing.
Blinkit pain: While Zomato clearly is moving towards profitability, this seems to be restricted to its core food delivery. Enthusiasm on quick commerce is high and the management is estimating $400 million of investment in this despite its lack of ability to forecast the profitability path beyond two years, at this stage.