I have been flip flopping in my head several times about the growth vs valuation of Zomato. On one hand it looks optically expensive and on other hand sheer growth numbers coming out of Blinkit especially prompt me to rethink again and again on the business. So I did some more work to come up with what is the thesis and anti-thesis going in my head -
Thesis
Food delivery GoV growth expected to be 20% for 2-3 years
Food delivery Adj. EBITDA to be 5% in medium term
So in 3 years, GoV can be 60K Cr with 3000 Cr Adj. EBITDA from food delivery
Growth to be driven by expansion in serviceable areas majorly, leading to increase in MTUs, ordering frequency and AoV increase will be other minor drivers.
Blinkit GoV is currently 12500 Cr
Zomato is planning to increase stores from 526 to 1000 in FY25
GoV growth rates have been 80-90% driven by increase in orders (SSSG + geographical expansion) and AoV growth. Going forward geographical expansion in top 8 cities ex-Delhi is going to be key driver. Drivers for GoV growth -
Dark store massive expansion 85% in FY25 itself
SSSG growth rates itself can be 15-20% as they reported 17% SSSG increase in previous quarters
Delhi is 40% of business and if other top 8 cities have to match the GoVs, then overall GoV can become 4x.
While it is hard to come up with precise number of GoV growth in Blinkit, but give above info it can be anywhere 60-70% (15% SSSG + 50% expansion led)
So the GoV of Blinkit can be 50K Cr atleast in 3 years
Management says that in steady state adj. EBITDA can be 4-5%. But if we assume there will be some part of network ramping up in 3 years, lets take 2-3% as adj. EBITDA. This means 1000-1500 Cr can come from Blinkit as Adj. EBITDA
So Zomato should do atleast 4000-4500 Cr adj. EBITDA in base case. (I have not assumed other businesses contributing anything for now)
Now this Adj. EBITDA should largely flow to bottomline. Assuming 25% tax rate, the PAT could be 3200-3400 Cr. (Tax rate may be lower due to carry forward losses)
Now question is, for a doubler, it should have 340K Cr MCAP by FY27. This means, it should have 100 PE in FY27 for the money to double from here on. I think if all plays out well by FY27, there is no doubt there will be clear margin expansion story with steady topline growth pending from there onwards as well. It could very well be 30-40% bottomline growth story 3 years out in FY27. Why would not market then give 100 PE to such consumer company growing PAT at 30-40%? Plus we donāt know optionalities that can come on radar as well with such large cash generating business.
Anti Thesis
Competition in Q-commerce as E-comm players are entering into it. I think this is primary reason for such high and quick dark store expansion as Zomato wants to acquire customers asap in top 8 cities of India.
Take rates deterioration in food delivery or Blinkit
Market not allowing enough margin expansion headroom at some point
Poor capital allocation calls and bad use of so much cash from the business
Misaligned objectives of management and shareholders
Swiggy vs Zomato for CY23. Numbers taken from Prosusās KPI datasheet for CY23. These are consolidated numbers (QCom + Food Delivery)
Iām not sure how will Swiggy ever make money for its shareholders. It requires significantly higher scale to achieve profitability akin to that of Zomato
Hello. Would like to start off by saying I havenāt gone through the discussion in detail, and have briefly perused it. But, had some interesting updates in their operational metrics, which I would like to discuss the viability of. The crux of the argument is that the AOV for blinkit and other QC brands (Swiggy, zepto etc) have increased in the last two years, paving the path to profitability. The fixed cost took up a smaller percentage from the AOV, and improved unit economics. In my view, this was a crucial key to unlock the myth of sustainable quick commerce.
The importance that I place on QC is because I feel it would take over the food delivery business in the next 6-8 years, and investing in zomato should be looked as an investment in an industry of that ilk. The report that details their AOV and unit costs can be found here, was an interesting read! Apologies if itās been mentioned before https://www.jmfl.com/Common/getFile/3278. Now, the question I have is motivated from recent orders I had placed. Iāve been ordering vim/chips/shampoo/soap from blinkit for a while now, and for the last 2 quarters the availability of small quantity SKUs in each category are getting harder to find. As someone used to the convenience of delivery within 10-20 min, I gave in and ordered a 500ml vim rather than 100ml, a big bottle of shampoo rather than a travel pack (which is what I intended). Is blinkit doing this on purpose? Making only the larger quantity versions available to synthetically drive AOVs? And, how would this impact the long run AOV?
Would appreciate everyoneās thoughts on the same. And, is there any way the average prices of the catalogue of blinkitās offering over time can be found? Thanks
These are personal experiences and even these will vary. The unavailability of items can happen. If an order consists of 15 items, and 2 or 3 items are unavailable, I think, customers will place orders for the available items, and look for the rest elsewhere. What good is a service w.r.t technology and delivery time, if items are not available in required proportion? More so when there is competition.
Used Blinkit, satisfied with the service. No position in Zomato, interested in the business.
Sure, agreed. Just spotted an interesting coincidence that might be true, prima facie. Of course, will need data to back it up- especially a comparison between the catalogues over time.
I also have faced this issue of non availability of small quantity products and this was the case most of the times. So, I looked at the other apps like Swiggy Instamart, Zepto and Big Basket now to find the same product of small quantity and to my surprise, I could not find it in other apps too. I have purchased bigger size products than required just because of the quick delivery and convenience. I think this is the strategy followed by all the grocery delivery apps available in the market. I used these apps in Hyderabad and not sure about the other cities though.
I also observed that there would be generally 1-2 rupees price difference as well in these apps on the higher side compared to the regular grocery delivery apps like Big Basket Supersaver etc. I still go ahead and purchase the products on these platforms knowing that the price is high just because it is just few bucks more for me Vs the convenience and quick delivery. I think this point was already discussed here earlier.
Going forward, I feel that these two points will become the key differentiators for these quick delivery apps to increase their revenues and profits.
Smaller Qty not available, its a part of Human Behaviour / Psychological Re-programming. First by making you used to the platform and building a dependency. textbook business model. (making you buy more and increasing the Gross Order Value. ) Something I would say on a similar lines for selling large qty at COSTCO (US Wholesale).
Analysing per my buying behaviour , I used to buy 1 Nissan Cup Noodles earlier 1 as the single quantity was available with 1-2 price discount than local retailer. But now a days i see packs of 2 with in total 2-3 price discount. So i end up buying more and the intake of the items has increase from 1 bi-weekly to sometimes 2 weekly, (now for couple of weeks no order of Nissan Cup Noodles)
The only thing to wait and watch is the adaptability to this model. If this gets deep rooted in India. The next phase in parallel I would say is to watch tier 3-4 cities, make them buy in small / usual / daily quantities. then transitioning.
textbook business model. (making you buy more and increasing the Gross Order Value. ) Something I would say on a similar lines for selling large qty at COSTCO (US Wholesale).
(now for couple of weeks no order of Nissan Cup Noodles)