Friday, May 10, 2024

Zomato Records Blistering Growth With Profitability As Blinkit Drives Upside



We interacted with industry participants to get a better understanding of the Quick Commerce (QC) business. Key takeaways: a) QC companies have found good product market fit in metros and large cities. They are gradually expanding their coverage in these markets and testing adjacent markets in a calibrated manner. b) 3 major QC companies – Blinkit, Instamart, and Zepto — compete head on with each other and the market-share gap is not so wide. c) QC companies have seen limited success globally and key variables driving success in India are: i) population density, ii) high prevalence of unorganized retail/local kirana stores enables QC companies to exercise relative buying power with scale, and iii) cheap labor costs. We have increased our FY25/FY26E EPS by 41-52% (EBIT by 18-20%) factoring-in higher growth/margin assumptions for Blinkit and lower ETR. With better clarity on product-market fit and roadmap to profitability for Blinkit, we now value it on DCF, compared to 1x FY26E GOV earlier. We retain BUY with a TP of Rs230/share (earlier Rs170) on SOTP basis; increase in TP is largely driven by Blinkit.

Food delivery business to maintain momentum

Food delivery GOV grew 20.5% in 9MFY24 (27% in Q3) after being muted for the previous 3Qtrs (Q2-Q4FY23). We expect healthy growth momentum in the near term on the back of steady increase in MTUs and ordering frequency, benefits accruing in take rate from new restaurants addition (21.5% YoY; providing more choices to consumer base thereby driving better network effect; joining at better-than-blended rates), and reducing dispersion in commission rates and platform fees. Delivery take rate has reduced over the last few quarters to 3.8% of GOV in Q3FY24 vs 6.2% YoY (Exh. 4), partly due to growing orders by Zomato Gold customers (~20% of MTUs but accounted for ~40% of GOV in Q2FY24). Company has started charging platform fees on all orders and is piloting priority delivery feature for extra fees in some locations.

QC companies’ product market fit is well established by now

QC companies have struck a chord with Indian consumers, particularly the urban digitally native (GenZs and millennials), who started ordering everyday needs across product categories via app, which is delivered within minutes. This led to the category becoming one of the most transacted categories online in the country. Household grocery purchase can be broken into 3 types: monthly, weekly/daily, and unplanned. QC companies started by catering to the needs of third type, but then gradually moving to the first two types. These companies have gradually expanded TAM by entering into newer categories. This shift will drive frequencies, AOV, and contribution margin. Overall, the value proposition hinges on both convenience and value (better experience at cost, lower than alternatives, mainly convenience/kirana stores), which is driving more clicks and wallet share gain. Brands are therefore looking to build visibility with a highly engaged and fast-growing customer base with spending power. Growing customer base with increasing frequency per customer (repeat transactions) augur well for profitability. Blinkit has sustained industry-leading AOV on the back of higher SKU availability, order fulfilment rates, better customer insights, and superior execution, which also aided profitability.

Earnings revision and valuation

We increase our revenue estimates by 0-2% and profit/EPS estimates by 42-53% for FY25/26E, factoring-in better profitability in Quick Commerce and lower ETR. With better clarity on product-market fit and roadmap to profitability for Blinkit, we now value it on DCF basis, compared to 1x FY26E GOV earlier. We retain BUY with a TP of Rs230 (earlier Rs170) on SOTP basis; valuing the food delivery business at Rs121 (DCF basis), Blinkit at Rs90 (DCF basis), and cash and other investments at Rs18 (book value).

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