Zomato's stock is hot again: Should you place an order?

Zomato pulled off a real surprise this quarter.

It posted its first-ever positive adjusted EBITDA of Rs 12 crore and a clean after-tax profit of Rs 2 crore. And that's not all – they recorded a revenue of INR 24.16 billion, which increased by 17.5% QoQ and a jaw-dropping 71% YoY.

Imagine a fast-growing, modern company actually making some serious profit!

Investors were over the moon. After the result announcement, its stock soared by 12% in just one day.

So, could this be the start of Zomato's rule? Is it a growth stock with real profits?

Let's dive into the business to unravel the truth!

Zomato’s business stands strong on three pillars. First, there's Zomato’s mainstay - its food delivery business. Then there's Blinkit, its quick commerce arm.

It delivers everyday products to customers within minutes. Basically, Blinkit hosts thousands of SKUs across a variety of product categories in its network of warehouses and dark stores and delivers them in minutes.

And lastly, we have Hyperpure, a B2B arm of Zomato that supplies ingredients to restaurants. It sources ingredients from farmers, mills, producers, processors, and then supplies them to its restaurant partners.

Let's start by digging into the heart of Zomato – its food delivery business.

When we look at a platform company like Zomato, we need to consider three important things.

• Gross Order Value?
• Monthly transacting users?
• Order frequency

First up is the Gross Order Value (GOV), which is the total value of all orders made on Zomato in a certain period. It covers everything from food costs to taxes and delivery fees, but not discounts and tips. This metric tells us how much Zomato's food delivery is growing. When GOV goes up, it means more and bigger orders.

In the last quarter, GOV went up by 11% compared to the previous one, which is a good sign. But if we look at the whole year, Zomato's GOV from food delivery has stagnated at? around ?6,500 crores.

Why the slow growth?

Zomato’s business has hit a roadblock. The number of people ordering from Zomato regularly, known as monthly transacting users, had more or less stayed the same in the last few quarters. In Q2FY23, there were 17.5 million monthly users, and as you can see, that hasn’t changed much in the following quarters.

Even, the rise in the GOV in this quarter was also because of one-off reasons.

For instance, there were special events like school breaks and IPL matches that got people ordering more.

Another reason for the jump in GOV this quarter was Zomato Gold. It's like a VIP membership that gets you special perks and discounts. This year, Zomato relaunched Gold, and now there are around 1.8 million Gold members.

In a quarterly report, Zomato said that more than 30% of its GOV came from Gold members. So, Gold is playing a big role in this impressive growth.

But here's the concern: When a fast-growing company like Zomato stops getting more users, it's a bit of a problem.

So, why isn't Zomato growing?

The food delivery business has a lot of potential to grow, especially because only 16% of people use it. So, why aren't more people using Zomato?

The answer is that the food delivery business isn't doing well in smaller Indian cities.

Zomato expanded its business in around 1000 cities in India, but until March 2022, most of its money – 60% – comes from the top 8 cities. The top 300 cities bring in 99% of the money. That means 700 cities aren’t even contributing 1% to its topline.

So, in January, Zomato decided to stop working in 225 smaller cities because even though they didn't bring in much money, they added a lot to the costs.

What's the main point here?

Food delivery is mostly a big-city thing in India and that market is already tapped out. There's not much business in smaller cities. So, Zomato needs to find ways to make more money from its current users. It needs to make them order more frequently.

This brings us to how often people order – the order frequency. As per a report by MOFSL, people are ordering more often from Zomato, about 3.2 times a month. That's a good sign.

The silver lining here is that even though the growth in the food delivery segment has stalled, the business has gone from losing money in Q1FY23 to making a good profit in the latest quarter. The profitability has improved drastically.

Now, let's talk about Blinkit, Zomato's quick delivery service. Investors haven’t really been fond of Blinkit. Zomato's stock even dropped 30% when they announced buying Blinkit.

Why?

Quick commerce is a tough business to crack, mainly because the costs involved in instant delivery are huge, however, the order values are usually small. That’s why it's difficult to be profitable in Quick commerce.

Speaking of numbers, this quarter, Blinkit's GOV went up only 5% compared to the previous one, reaching Rs. 2140 crores.

But here's something: Blinkit has actually grown a lot in the past year. Its GOV has almost doubled in the last one year from Rs. 1171 crores in Q1FY23 to Rs. 2140 crores in Q1FY24.

They slow growth in the recent quarter on store closures, strikes, and bad weather – kind of one-time issues.

Ever since Zomato acquired Blinkit, it has been a kind of money-loser for Zomato. It has dragged Zomato’s profitability down in the last few years. However, it seems like they are making some serious efforts to improve their profitability. As the contribution margin of Blinkit - the money it makes on each order net of all costs has improved drastically in the last year.

The improvement in margin is due to the high average order value.

They're making more money on each order. The average order value went from Rs. 528 to Rs. 582.

Even though quick delivery isn't the best way to make money, Blinkit is doing better. It's a tricky business, but they're making progress.

Now, let's talk about Hyperpure, the fastest-growing business of Zomato. Its revenue went up 29% compared to the previous quarter and a whopping 126% compared to the previous year. That's INR 617 crores!

But if we look closer, growth has slowed down a bit compared to last year. Hyperpure’s revenue in this quarter grew 146% YoY, which is the lowest in the last year, which is a cause for concern.

Hyperpure almost reached EBITDA break-even in the last quarter too.

Now, despite all this, Zomato did have a loss of ?15 crores. Surprising, right? But the ?2 crores profit everyone's talking about? Well, it's kind of a tax thing. There's a provision called "deferred tax" worth ?17 crores. After adjusting for that, they made a profit of ?2 crores.

We’ll not go into the details. Just think like, they claimed some tax credits and were able to whip up the? ?2 crore profit.

Even though Zomato didn't really make it into the profit zone, they're doing a pretty good job at cutting down their losses.

If we temporarily forget about taxes and focus on the actual money they lost, in the quarter that finished in Mar 23, they were in the red for a whopping ?205 crores. But look at them now – they've shrunk that to just ?15 crores.?

So, while their growth might be taking a little break, their ability to make money has gone up.?

What's coming next for Zomato, will it be able to sustain its profitability and power its growth at the same time? Well, we'll just have to wait and watch!