Zomato’s path to profitability in the next three years requires two things, say analysts

• While Zomato’s sales have been increasing, the food delivery giant is still unable to make profits on account of huge expenses led by discounts and marketing.
• It posted a net loss of ₹1,222 crore for the March quarter, which is an increase of nearly 50% since last year.
• However, analysts believe the food delivery business has a huge potential as it is estimated to be a $110 billion opportunity by 2025.
• Both Zomato and its rival Swiggy together hold 90-95% market share in India’s food delivery business.

Food delivery company Zomato has been reeling under the pressure to turn profitable since July last year, the day it went public and raised over ₹9,000 crore from the public. Since its listing, Zomato investors have seen their wealth decline by half, and there seems to be no letting up yet.

Brokerages believe there might be a chance for the company to woo investors in a few years as there lies a huge opportunity in front of them.

According to a report by JM Financial, Zomato’s path to operational profitability (also known as EBITDA profitability) requires two things.

EBITDA is short for earnings before interest, taxes, depreciation and amortisation.

“We believe order volumes and contribution margin per order are two key variables that would determine Zomato’s path to profitability. Our analysis suggests the company can turn profitable in FY25 on a cash EBITDA basis if it were to reach annual order volumes of 1 billion (2.5x FY20 levels) and a contribution margin of around ₹21 per order,” said the report.

Adding to it, the report says it sees a ramp-up beyond the food ecosystem can also provide incremental growth.

It expects Zomato to follow global peers in terms of expanding beyond food delivery and explore adjacencies in the form of grocery delivery, alcohol delivery, medicine delivery, on-demand delivery and insta shopping. Its recent investment in Grofers and a majority stake in Fitso is a validation of expansion into adjacent areas, states the report.

Gen Z population offers attractive growth opportunities to Zomato
The number of online shoppers in India is expected to grow to 300- 350 million by FY25 from 100-110 million in FY20 according to Bain & Company.

“With around 10 million monthly active users, the current penetration rate for Zomato within the online product shopper base works out to around 10%. We expect this penetration to increase to around 15% over the next 5 years, effectively growing the monthly active user base of Zomato to 45 million by FY26,” said the report.

The brokerage expects the growth to be driven by the growing share of millennials/Gen Z in the ‘earning’ population and fast-growing e-commerce penetration beyond Tier-1 cities.

Customer addition remains strong, but 9 out of 10 orders are from old users
New customer additions by Zomato remained strong in Jan-Mar with around 5.5 million new additions. However, more than 90% of its food delivery business is being driven by repeat users compared to new users.

“The company expects growth in the near term to be driven by repeat customers as there is substantial room for improvement in average annual ordering frequency (which is around 10 per user per year),” said the report by JM Financial.

Zomato now operates in more than 1,000 cities across India as it added 300 plus new cities in Jan-Mar. Top 8 cities contributed around 60% to gross order value. However, its losses continue to swell, ballooning by nearly 50% in the March quarter to ₹1,222 crore, when compared to the previous year.

Some analysts believe the change in the company’s performance needs to happen soon to turn around the loser story.

“With the current inflation, the margins will lower further due to increased cost of fuel, raw materials etc. Acquiring different companies won’t help much in expansion, rather it will make management more difficult,” said Majoj Dalmia, founder and director at Proficient Equities.

“Existing management needs to be optimised for profitability; the growth prospects will depend on current performance and not future, if there is a turnaround now, then we can expect some good growth story,” he added.

$ZOMATO.NSE Zomato delivers the food on time, But no good returns to its holders, structure at moment is week. Any upside possible only if closed above 76 and sustained at least for 2 days. Check out the below chart for detailed analysis.

— (@Swapnilkommawar) June 09, 2022

SEE ALSO: INTERVIEW: Pepper Content skip the traditional Middle East route, heads directly for the US market
Wipro, Yes Bank, Tata Power among stocks to watch out for on June 9