Q1 results have encouraged analysts to lower their loss forecasts for Zomato. It also helps that the company has given some visibility on profitability. It now expects the overall business to breakeven on adjusted Ebitda by Q4FY23 or latest by Q2FY24. In Q1, the company achieved breakeven on adjusted Ebitda in the food delivery business.
But the targets seem like a stretch, as of now. “We believe accelerated profitability may be hard to achieve without severely compromising on growth. We therefore forecast adjusted Ebitda break-even for Zomato only by H1FY25, while marginally tweaking down our gross order value (GOV) estimates over FY23-25E to account for macro headwinds," said analysts at JM Financial Institutional Securities in a report on 2 August.
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True, in Q1, contribution as a percentage of GOV rose to 2.8% from 1.7% in Q4FY22 driven by higher take rate (which is revenue as a percentage of GOV). Note, Zomato has clocked higher contribution margin in earlier quarters (FY21). This was helped by lower discounts and higher demand driven by the pandemic-led restrictions, said analysts. Also, the inflationary environment was comparatively benign back then.
With normalcy resuming and the elevated inflationary scenario at present, it will be a tall ask for the company to reach those levels in the near term.
“Zomato is investing in expansion across cities, incentivising deliveries, and promoting its brand in new cities, which would weigh on the contribution margin. However, as Zomato scales up and when there is increased ability to charge higher for delivery without affecting growth, there will be a meaningful rise in contribution margin in future," said an analyst requesting anonymity.
Meanwhile, Blinkit continues to be in the red. But it saw growth in key metrics.While Zomato already invested $150 million in this business, it has lowered its total investment guidance from $400 million to $320 million.
Going ahead, Zomato’s investors will closely track how the Blinkit integration pans out. Further, delivery on Ebitda targets will be a key trigger for the stock, which is still 27% down from its issue price of ₹76 apiece.
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