Analyst Corner: Retain ‘buy’ on Zomato as worst is probably over

Worries of Fed tightening are weighing on the profitless internet names globally.

The entire sector has been going through a period of readjustment as the focus is shifting from growth to cash flow.

From an exuberance at the time of listing last year, Zomato is now unloved, having under-performed peers year-to-date (YTD). Blinkit acquisition elongates path to profitability and despite management guidance on a break-even in food delivery, investors are not giving much benefit of doubt.

Stocks under pressure: Worries of Fed tightening are weighing on the profitless internet names globally. The entire sector has been going through a period of readjustment as the focus is shifting from growth to cash flow. This has also been impacting the global food delivery stocks which are down 50-65% YTD, with Zomato being the worst performing stock.

Profitability in food delivery: Zomato management has also accelerated its journey towards better unit economics and is now eyeing a break-even in the food delivery business in the foreseeable future. Adjusted Ebitda losses for 4QFY22 was <$30 million, with food delivery losses at $10 million. We expect this to get better quarter after quarter now.

Industry structure helps: We expect tight liquidity conditions to also push Swiggy to focus on profitability as it also builds businesses beyond the core (particularly its quick commerce offering under Swiggy Instamart). With worst of the competition behind, industry profit pool should rise as the sector is already consolidated unlike some of the other spaces in India.

Cash conservation: Unlike past, where Zomato intended to invest across multiple businesses, with some strategic (eyeing an eventual merger) and others as financial investment, the company now intends to conserve cash. The company does not plan to commit any resources for existing or now minority investments.

Quick commerce is tough: The only exception to the conservative stance of the management is its decision to buy Blinkit, which may be driven by FOMO or protect its food delivery turf, as highlighted post acquisition. This remains a medium-term concern for investors as this would weigh on company’s profitability.

Reiterate ‘buy’: Following the sharp correction in Zomato share price, the stock now trades at 0.9x 1Y forward EV/GMV and 3.5x EV/Revenue. While this is at a premium to global and regional peers, this is justified in the context of long growth run-way along with higher explicit medium-term forecasts on GMV (30% for Zomato versus 10-20% for peers). We also see a consistent improvement in profitability in food delivery despite a strong 30% CAGR over FY22-25E (well ahead of global/regional peers). We retain ‘buy’.

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