Recommendation from Online Services Sector

This column gives you a scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

ZOMATO: CASHING IN ON LIFESTYLE TRENDS

HERE IS WHY
✓ Good prospects for online food delivery
✓ A well-balanced revenue model
✓ Expansion plans pay off

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. According to available statistics, the online food delivery market in India is expected to show a CAGR growth of 16.95 per cent until 2028. This growth will result in a projected market volume of USD 81.91 billion by 2028.

The market volume for grocery delivery in India is projected to be USD 30.65 billion in 2024 and revenue is expected to grow by 30.7 percent in 2025. Taking these factors into consideration, our choice scrip recommendation for this issue is Zomato, which is a leading player in the industry that 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 also holds other brands like Zomato the food delivery app, Hyperpure which is a food supply platform for restaurants and Blinkit that is an online shop for groceries which delivers orders to the doorstep. In Q3FY24, on a consolidated basis, the company’s net sales rose by 68.79 per cent YoY to ₹3,288 crore compared to ₹1,948 crore from the previous year’s same quarter. On a sequential basis, revenue increased by 15.45 per cent. Its PBIDT excluding other income turned positive at ₹51 crore as compared to negative ₹366 crore from the previous year’s same quarter, while sequentially it was at negative ₹47 crore

The company’s profit after tax (PAT) has shown consistent growth and from the last three quarters it has turned positive, currently at ₹138 crore compared to a net loss of ₹347 crore from the previous year’s same quarter. It sequentially increased by 283.33 per cent from ₹36 crore. The food delivery gross order value (GOV) growth in Q3FY24 was lower than expectations but still higher than some of the other players in the restaurant industry. The platform’s growth is driven by the underserved supply and the monthly active restaurant base, which has grown by 20 per cent YoY in Q3FY24.

The GOV grew 28 per cent QoQ (103 per cent YoY) due to the robust uptick in demand due to multiple festivals and occasions. Most of the GOV growth was order volume-led, but part of it was driven by an increase in average order value, benefiting from a higher mix of high average selling price categories such as electronics, festive needs and home decor. Zomato is poised for continued growth and market dominance. The key factors include expanding ‘quick commerce’ with Blinkit, a hyper-local delivery service, and increasing market penetration.

Partnering with restaurants and other businesses for in-app advertising can be a lucrative source of income. Expanding the Zomato Gold programme with enhanced benefits and exclusive offers may incentivise customers to subscribe for a premium experience. Zomato is well-positioned to capitalise on these trends with its strong brand recognition and wide range of services. Considering all these factors, we recommend BUY.