Zomato posted a ₹1,222 crore loss but its stock gained 18% — reasons behind the surge

• Zomato posted a net loss of ₹1,222 crore for the March quarter — which swelled by ₹400 crore since last year.
• The company had given too many discounts during the quarter loading its expenses which is nearly 40% more than the revenues it earned in FY22.
• Both Zomato and its rival Swiggy together hold 90-95% market share in India’s food delivery business.

Zomato has been losing steam ever since PayTM’s listing debut took the wind off all tech startup valuations. But today, the stock gained 18% even as it posted a net loss of ₹1,222 crore for the March quarter — which swelled by ₹400 crore since last year.

The secret of this investor interest does not come from its revenues which nearly doubled either. The company had given too many discounts during the quarter loading its expenses which is nearly 40% more than the revenues it earned!
Source: Zomato’s financial statement

Prashanth Tapse, vice president of Research at Mehta Equities noted that the reason behind Zomato’s increased expense were high discounts that company has been giving to overcome tough competition.

“I believe at this juncture, accumulated losses would remain a high concern and it only requires more capital to keep the business going,” Tapse noted.

Zomato’s CEO Deepinder Goyal, and CFO Akshant Goyal too noted that discounts was one of the major levers of the company’s expense, along with delivery and other variable expenses.

Commissions, ad sales and delivery charges

However, with the market share it enjoys, Zomato has found key levers on the revenue side like restaurant commissions, ad-sales and customer delivery charges. Zomato and its rival Swiggy together hold 90-95% market share in India’s food delivery business - while Zomato is a dominant player in North India.

It had 204,000 active monthly partners at the end of March 2022, and 316,000 delivery partners. It is also preparing for the next stage of growth with reduced losses, and has expanded its presence at another 300 cities between January and March 2022 to tap into 1,000 cities in total.

Zomato also has a four-pronged strategy ahead — focus on customers, business expansion, profit making/reducing burn, quality and speed of execution.

“These four high level priorities haven’t changed over the last couple of years, and I know that they are generic and apply to almost every business. However, this is a framework of prioritization for me, and the actual how-to’s (read: to-dos) keep changing based on the environment, or when I get new information about our business,” Goyal added.

Brokerage firms seem to believe in Zomato’s vision and have a ‘buy’ rating on them — though most of them have been reversing their ratings in loss-making startups after PayTm’s failure.

Zomato made a stellar debut on the stock market, at a premium of 51%, as the company was listed at ₹116 against the issue price of ₹76. However, its share prices have been on a decline ever since the start of 2022 due to sharp corrections in the market.

The Gurugram-based company’s shares have fallen around 54% since January 2022. They closed for trade at ₹65 on May 24.

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