Recommendation from Online Services Sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

ZOMATO : TASTING SUCCESS ALL THE WAY

HERE IS WHY
✓Strong brand recognition
✓Driven by lifestyle changes
✓Positive growth outlook

The online food delivery industry is a rapidly growing sector that offers convenient and affordable food delivery services to customers. The industry is expected to continue growing due to factors such as urbanisation, working women and convenience. Taking these factors into consideration, our low price scrip for this issue is Zomato Ltd., a leading player in the industry that operates in over 25 countries and offers services such as online ordering, restaurant reservations and loyalty programmes. The company’s main revenue streams come from commission fees charged to restaurants and delivery fees charged to customers, as well as advertising and subscription fees.

Zomato is well-positioned to capitalise on these trends with its strong brand recognition and wide range of services. In Q1FY24, Zomato’s financial performance was strong, with revenue growth of 17.5 per cent (QoQ) and 70.86 per cent (YoY). Total expenditure also grew but at a slower pace than revenue by 8 per cent to ₹2,464 crore on a QoQ basis and 43.17 per cent on a YoY basis, resulting in a QoQ improvement in PBIDT margin excluding other income from – 10.96 per cent to – 1.99 per cent. PAT also turned positive to ₹2 crore, a QoQ increase of 101.07 per cent and on a YoY basis it increased by 101.08 per cent with a PAT margin of 0.08 per cent. 

The company’s success in cross-selling ads to restaurants is a sustainable revenue stream. Zomato is expected to deliver a 25 per cent | 107 per cent revenue CAGR in these verticals over FY23-25, boosting its consolidated revenue by 43 per cent. This strong revenue growth should drive significant margin leverage, as competitive pressure in quick commerce has eased due to the funding crunch for smaller peers. Zomato’s long-term growth opportunity remains positive, despite competition intensifying and ONDC’s entry. Zomato’s Hyperpure business experienced a 180 per cent YoY increase in revenue in FY23, reaching ₹15.1 billion. This growth was attributed to the addition of new customers and increased spending from the existing ones. Zomato Hyperpure has also begun to explore the quick commerce market, supplying goods to sellers on Blinkit’s marketplace. 

We believe that the quick commerce market is a significant opportunity for Hyperpure and the company is investing heavily in this area. We are also of the opinion that the management is confident and competent in achieving 40 per cent+ organic growth over the next couple of years, driven by an increase in user numbers. The company expect a 4-5 per cent EBITDA margin in the food delivery business. The food delivery business in India is still in its early stages, but Zomato, with a dominant market share and strong growth in the food delivery business along with Hyperpure, is expected to report strong revenue in the coming years. 

This growth is partly seasonal, peaking during school holidays and good weather. Despite the emergence of smaller players due to an increased minimum order value requirement, Zomato is exploring synergies between its delivery fleets for food delivery and quick commerce. And in spite the high food inflation, smaller players are increasing ad spending on Zomato’s platform to support growth and improve the average order value for Q1FY24. The change in lifestyle which is making ordering food online a trend among all kinds of households will also trigger growth, including smaller cities and towns. Considering all these factors, we recommend BUY.