The street is not 'Blinking' on Zomato anymore

• Zomato management is confident of growing at a CAGR of 40% for the next two years.
• Food inflation has been affecting their restaurant partners but that’s making them advertise more.
• The street has been worried about Blinkit acquisition, now believes it’s a rare growth plus profitability play.

Zomato has delivered more than profits to the table in the first quarter. It’s a rare new-age company that’s posted profits, without backing off from the high-growth path that companies such as it are known for. The street cheered the stock as it went up by 10% in morning trade.

In addition to posting consolidated net profit of ₹2 crore for the very first time, it also guided that its revenues will grow at a compounded annual growth rate (CAGR) of 40% for the next two years.

Zomato has confidence that none of its peers in the consumer business has displayed in the first quarter. “The assumption is that the worst is behind us in terms of demand slowdown. From hereon, there will be incremental growth and we are confident of delivering that growth,” Akshant Goyal, the CFO of Zomato said in an earnings concall.

Its closest listed peers, quick service restaurants (QSRs) are seeing a dullness in their delivery business, Zomato believes that it won’t affect them as they contribute to only a single digit percentage of the business.

Moreover, the spikes of seasonality have also tempered over time as IPL cricket matches that bring in a lot of orders in the past, have also gone down. The cricketing season had little to do with the 11% sequential growth in gross order value (GOV) that it has seen in Q1.

“IPL doesn’t have much of an impact on our business as seen in the last two years. The seasonality is more towards the weather, school holidays etc,” explained Goyal, indicating that food ordering has turned into more of a habit than an event-driven exercise.
Food inflation? It helps us
The ‘platform’ that Zomato is, has multiple revenue levers, and is also seeing benefits from food inflation that’s affecting its restaurant partners. “Small restaurants, given the lack of growth of their business, are spending aggressively advertising on our platform and this trend has also helped our take rates go up,” Goyal explained.

Zomato now has multiple businesses under its wings — the food delivery business which remains its core; dine-in business, quick commerce business Blinkit, and Hyperpure, the business which delivers ingredients to restaurants. Each of them is at a different stage of maturity adding to its profits and growth at different levels.

“Our portfolio will be as it is, some businesses will grow faster than others. But if we can grow our revenues by 15% sequentially in one quarter, then we can easily aim for 25-30% growth (food business) this year and the next,” said Goyal.
The IPO hangover
This management confidence has rubbed off on the street, which has been worried about the acquisition of Blinkit which was done after the initial public offer in late 2021. Most brokerages have been lauding the company with a variety of adjectives – the best of which is upgrades.

“In a journey of dramatic twists and turns since IPO, Zomato achieved a key milestone of adjusted EBIDTA and consolidated PAT positive, way earlier than the guidance. This puts to rest all the concerns around Zomato's ability to make 'respectable' profits. Results also give more credibility to the management and its execution prowess, which is particularly positive for Blinkit which most investors ascribe zero (or negative) value,” says Jefferies.

Kotak Institutional Equities raised its FY24-26 food delivery revenue estimates by 8-9%, driven primarily by higher take rates. “Our EBITDA/EPS estimates witness sharp upgrades as we bake in higher CM with the resultant operating leverage benefits. Blinkit business can drive further upsides to estimates as well as fair value,” it says.

J M Financial calls it a long-term growth story. “We continue to be bullish on the company’s long-term growth prospects in the hyperlocal delivery space as we believe it is well positioned to benefit from robust industry tailwinds such as improving tech penetration and rising income share of digitally native millennials / GenZ,” it says.