Better to invest in infoedge, which has significant stake in both zomato and dotpe…
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In my view, there are a few big fundamental issues with the business.
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Peak Margins - The company may struggle for many years to increase its margins. the commission they charge to the restaurants is already very high and the possibility to increase it is very very slim. Restaurants are not happy with the % delivery apps are charging them and some of them are already looking for alternatives to delivery apps.
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Restaurant listing and placement on the app - The mobile screen is small and at a time only listed numbers of restaurants can be shown on the app. the restaurants which have paid promotions show up top, this means that there may be restaurants with better food out there but u might end buying from the restaurant with the top 5/10 in the search option. This is a disadvantage to the restaurants listed on the app and slowly they will realize this.
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The restaurant business may have gone higher however that has been offset by the commissions they pay to delivery apps and the upfront fees to list themselves. my friend used to run a cloud kitchen in Bandra and i have the costs of delivery apps on the margins. they had to shut down eventually because they were tired of all the discounting happening during that time. this was in 2018-2019.
now that they are listed they will be answerable to analysts and institutions and their cards are in the open. Capital Markets are about efficient use of capital and those who so over manage to do that get the vote of the investors.
All those huge cash burns ideas are not going to fly now. it can be a good buy at its price to book value of 21 rs.
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Will ONDC dent Zomato and swiggy’s business?
So, where to ideally begin?
One, the focus should be on restaurants and eateries for two reasons:
They have the greatest recall value when it comes to customer satisfaction and trust.
They are the ones most pained by the current platform model, where they lose a large chunk of their profits to hefty commissions.
Onboarding restaurants would do ONDC what onboarding local retailers and mom-and-pop stores did for UPI, encouraging consumer adoption.
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Reminds me of what I had thought and mentioned earlier, if the ecosystem of restaurants/agents are in pain, it’s only so far you can go…
Interesting is that such companies keep changing narratives…I read somewhere that they mentioned their some other business can be bigger than food delivery…so while some may think it’s good they do not wait for disruption to happen to them…but do they really have a long term business model to make the ecosystem better or they just using gaps for only themselves and how far can that go…I don’t know…
Disc. Above thought academic and can be completely wrong in all my assessments above
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i strongly feel zomato will double from here…in 1-2 years…
It’s improving the business and the business has a comfort and recall value + it’s doing way better than swiggy and it’s a dupoly and
zomato and blinkit are almost mon negotiables for working people
premium milega isko…once it gets on track… people don’t look at valuations when the tide changes…
obviously a contra view…but just a hunch…
to get a 1lakh crore Mcap in country like India and in this sector is not impossible… food business is already profitable in major cities…
also after sometime i feel…
Zomato will pivot to also a data play and higher margin segments like cloud kitchens with the amount of backward integration it has… and the access to localised cuisine prefence data
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How did you come to the conclusion that Zomato does way better than Swiggy? Agree that it’s a no brainer for working people but Blinkit has very heavy competition from Swiggy Instamart, Dmart, Zepto, Amazon Fresh etc.
I personally use Swiggy. I used Zomato in past for restaurant reviews but now Google throws much better recommendations than Zomato can.
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To add to this, last time when I ordered food, swiggy gave better price than Zomato. However I use Zomato pro for dine in payment to get discount from select restaurants.
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+1 to this. With such high delivery cost, and extracting such high margins from restaurants, I don’t see much headroom for the business on both sides atleast in 2023.
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Can you please share
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Read research reports
Here is my take on Q3 results:
1. Food delivery
- Growth: Decent. QOQ dergowth, because December is a historically week quarter historically due to travel, vacations etc.
- Margin: I have no clue what adjusted EBITDA means, so I can’t comment
2. Hyperpure
- Growth: Strong. QOQ increase, 100%+ yoy increase.
- Margin: I have no clue what adjusted EBITDA means, so I can’t comment
3. Quick commerce
- Growth: Disappointed. 50 day revenue was 142 Cr last quarter, and this quarter they did 301 Cr. So about 20% growth after adjustment (pun intended)
- Margin: I have no clue what adjusted EBITDA means, so I can’t comment
Given the limited information from Zomato’s balance sheet, I felt compelled to another company door dash, which is in a similar business (minus Hyperpure). The stock price seem directionally correlated (extent of direction varies)
In comparison to DD, Zomato is over-value in every respect
A few other things to consider:
- Zomato has a higher growth rate, but DD is not too far behind. Growth rates are difficult to decipher due to acquisitions, lock-down impact etc
- Unit economics are much better for DD
In my opinion, I think there is still froth in valuations. My view is closer to Aswath Damodaran, that 35-40 is the deep-value price (assuming 50% premium basis comparison with DD)
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I do not like the “adjusted” revenue, adjusted “ebidta” stuff. I would appreciate if anybody can simplify them to me. I believe partly has to do with share dilution. But adding back delivery charges left me scratching my head.
However, every company is required to also disclose non adjusted numbers every quarter. Screener lists non adjusted numbers. This shows a clear plateauing of revenue and also positive net profit for current and last quarters.
Synergies with Blinkit and zomato instant and hyperpure are some dark horses.
Comparison with DD is not entirely fair. India is far denser hyperlocal market. US has a huge dining out culture and driving around is more pleasant. Door delivery of food is a godsend in India. Zomato, swiggy duo poly and competition from other e-tailers and the evolution of market share dynamics is not easy to model.
DISCLOSURE - Invested and under water.
The Zomato Mindset
The current scenario at Zomato refers to “A Positive Mindset can Drive a Person but not an Organization.”
The top management of Zomato is giving an upper hand to growth rather than profitability in which they are justifying these terms on the mindset that Growth would eventually lead to Profitable Business in upcoming months. Long term Sustainability is still visible to the team.
Where the company’s food delivery business saw a macro-slowdown but other quick commerce businesses “Hyperpure” and “Blinkit” displayed substantial growth on local and national level. This growth is definitely a positive development for the company but they aren’t huge revenue contributors to the total revenue. Both these businesses are renowned names in their respective sectors and have done good business overall in Q3 FY23. They only contribute 17.5% (Hyperpure) and 12.75% (Blinkit) of revenue. They did show growth in the quarter but as low revenue contributors, it won’t change much of the topline. These are still unprofitable.
The company’s current focus is on the Brand new Membership Concept of “Zomato Gold” in which the customer is made available multiple services like On-Time Guarantee & Exclusive Access to Restaurants in Peak Hours for Both Delivery and Dining Out. But according to the numbers provided by the company, there are 900K subscribers of Zomato Gold. The total subscription base of Zomato is 58 million users in FY22-23. So if we look at Zomato Gold Subscribers as compared to total Zomato users, it just comes to 1.5% of the total Zomato User Base. Now, this definitely raises a question as to how many of these subscribers will renew their Gold subscriptions every time and how loyal will they remain to these extra services that Zomato provides.
They are also closing down their food delivery business in unprofitable smaller cities which is a positive development from an investor’s perspective but definitely will have an impact on the user base.
Given the above points which I focused on, I doubt how they will achieve Adjusted EBITDA of 4-5% of GOV by Q2FY24. The question definitely still seems to be unanswered.
Let us know what you Think in the Comments Section of the Blog.
References:
https://www.bseindia.com/xml-data/corpfiling/AttachHis/8796b22f-7855-4956-afe2-409350dd685a.pdf
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THRIVE ,a good model ,on lines of ONDC, to give options other than the forced 25% cut to be given to SWIGGY & ZOMATO.
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Any start up IPO basically means that private funding has dried up and the end game is on. Now, Zomato has Rs 7,000 crore left after leaking cash of Rs 900 crore in FY23. Armageddon is a few years away at this rate.
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Finshots Article on Zomato Profitiblity:
The Story
₹2 crores as profit after tax (PAT). That’s what Zomato managed to pull off this quarter.
And everyone’s overjoyed. Investors, the founders, other startups. And they’re raving about Zomato because no one expected the company to turn a profit this quickly. Hell, even Zomato’s team predicted that profits were at least 3 quarters away. So it’s a nice little surprise.
But how did Zomato get here, you ask?
Well, it’s not rocket science. As Deepinder Goyal, Zomato’s CEO had pointed out earlier, the company just needed to do two things — “increase profits in food delivery and reduce losses in the quick commerce (Blinkit) business.”
So, let’s look at how food delivery is stacking up. And we’ll focus on this primarily since it’s still what Zomato does best.
Now there are 3 key metrics when it comes to this business.
There’s the Gross Order Value (GOV). You calculate this by looking at the total money spent by users ordering food. This figure has risen by 11% over the previous quarter. Sure, a part of it could be attributed to seasonality — school holidays, IPL, and other summer events we witnessed during the first quarter of the financial year. But, if you rewind a bit, you’ll see that the GOV was stagnant at ~₹6,500 crores for the entirety of last year. So things seem to be looking better this year.
But does that mean more people are now using the platform to order food?
Well, that’s why we look at something called the Monthly Transacting Users (MTU).
Now, on average, there are around 17.5 million people using the platform on a monthly basis. But the surprising bit is that this number hasn’t moved much. In fact, nine months ago Zomato had 17.5 million monthly transacting users. So they haven’t been able to push more users to transact on the platform. And that’s a bit of a worrying sign. Investors will have to wonder if the food delivery business has already captured all the low-hanging fruit.
What do we mean?
Well, at first glance, the penetration levels of online food delivery (at around 15–16%) seem quite low. You could argue that there’s still a big market to claim.
But let’s just draw a parallel with e-commerce for a second. A few months ago, we dived into a report by venture capital firm Blume Ventures. We pointed out that in the case of e-commerce, 19% of India’s households shop online. Similar to food delivery, no?
Now if you break this down further, you’ll see that within the high-income category (greater than ₹6 lakhs), the e-commerce penetration is already at 37%. It’s right up there.
While we don’t have a similar breakdown for food delivery, it might well be the case. And maybe that’s why Zomato has been pruning its city portfolio — in January this year, it decided to exit from 225 cities. The business just wasn’t good enough.
So if the urban areas are already quite tapped out, Zomato just has to find ways to squeeze out revenue from its existing users.
This brings us to the Average Order Value (AOV). This is quite important to track because it costs the company pretty much the same money if they’re delivering an order that costs ₹200 or delivering an order that costs ₹400. But, they earn higher commissions from the higher order value.
Unfortunately, Zomato didn’t break this down for food delivery. But it did say there was a ‘modest uptick’. In FY23, it was around ₹407. So it’s probably a bit higher now.
But investment research firm Nomura also calculated something else — how often Zomato’s users were ordering every month. They’re asking if the quirky push notifications are doing a good job of nudging users to place more orders. And their estimate is that the frequency has gone up from 3 orders a month to 3.4 now.
What could be a reason for this?
Maybe it’s Zomato Gold.
See, Zomato’s had a lot of variations of their infamous subscription service over the years. There was Gold. Then there was Pro. And there is Gold again. And here’s how Zomato described its features when it relaunched in January this year.
The key highlight of Zomato Gold is ‘On Time Guarantee’ [if you dont’ get food on time you get a cashback]. This feature was three years in the making, and the tech which powers this feature is a significant achievement for our team. Gold members also get priority access to more restaurants during peak times and offers from a number of restaurants on both delivery and dining-out. We have also made our intercity delivery from legendary restaurants (called Intercity Legends) exclusively available to Gold members. And of course, free delivery on orders meeting certain criteria. In less than a month, the Zomato Gold program has scaled to 900k+ members.
This means that Q1FY24 (April-June) is the first full quarter of the revamped Zomato Gold program. And orders from Gold subscribers already make up 30% of the GOV in food delivery. So if Zomato’s hunch is right, this time, it certainly looks like they have struck Gold. Literally.
Put all this together, you’ll see that the food delivery business has steadily been churning out profits in the background even though we haven’t seen superlative growth.
The problematic child was Blinkit, the quick commerce, loss-making delivery player Zomato bought in June 2022. Investors were not happy back then and the stock quickly slumped by 30% after the announcement.
But it looks like things are finally turning around here too.
The GOV has doubled from ₹1,000 crores to ₹2,000 crores in the past year. The AOV has crept upwards to ₹582. And what they call ‘contribution’ has fallen sharply. Think of this as the money that the company makes on each delivery after deducting the cost of getting it to your doorstep. And after including any other processing fees. If you calculate this as a percentage of the GOV, it’s almost positive now.
Maybe a part of this is because Blinkit has been cutting down the amount of money it pays out to delivery riders. As per a Medianama report a few months ago, the cuts were drastic:
Irfan (alias), a Blinkit delivery executive, informed us that when he was working with Blinkit earlier (when it was called Grofers), he was earning Rs 50 per order. When the company transitioned its name to Blinkit, its earnings were reduced to (on average) Rs 25 per order. Now, under Zomato’s leadership, the earnings have further reduced to (on average) Rs 15 per order.
Even Albinder, the CEO of Blinkit pointed out how they had a temporary business disruption in the month of April resulting from the change in the delivery partner payout structure. So while this won’t please gig workers, it’ll make shareholders happy.
And with only 4 million households MTUs on Blinkit at the moment (compared to 17.5 million for Zomato), the runway for growth is much bigger. In fact, Deepinder Goyal thinks that it’ll be more important to Zomato’s shareholders than food delivery in 10 years time. That’s an interesting bet.
So all in all, definitely looks like a good show at Zomato, no?
But there’s one little secret we have to share too…despite all this, Zomato actually still suffered a loss of ₹15 crores.
Yes, a loss!
So what’s the ₹2 crores profit everyone’s talking about then, you ask?
Well, as Moneycontrol pointed out, there was a tax provision that came to the fore. Or a line item called “deferred tax” worth ₹17 crores. And once the adjustment was made, voila, we had a profit worth ₹2 crores.
Now think of deferred tax as a situation where Zomato might have paid taxes in the past, but, they’re now allowed to offset the tax amount against the loss they made. It’s just the way accounting works.
And while we don’t exactly know what led to Zomato’s deferred tax windfall, just know that it’s really not something new in the food delivery company’s books. They’ve been claiming deferred taxes for a few quarters now.
So the million-dollar question is — can Zomato sustain the profits if it has come on the back of a tax gain?
Well, probably.
Let’s ignore the deferred tax for a bit. Just look at the overall loss itself. In the past couple of quarters, it was nearly ₹200 crores. So it has already narrowed sharply to the ₹15 crores that we see now. And with its efforts to cut costs even further, things are looking good.
So we’ll just have to wait and see how the story plays out, no?
Until then…good luck, Zomato. Everyone’s rooting for you.
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I hope people could see this which I said in November 22…
It doubled as expected
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