Zomato's profitability surge earns investor confidence; Bernstein gives 'outperform' rating

Zomato has managed to reach Consolidated Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) break-even three quarters ahead of its initial target, accomplishing this feat in Q1FY24 instead of the originally projected Q4FY24.

Zomato, one of India's leading food delivery platforms, continues to gain investor confidence by achieving profitability milestones well ahead of schedule. The recently released Bernstein report highlights the company's strong performance, citing factors such as sustained improvements in contribution margins and robust execution as key drivers of its success. This accomplishment has not only reinforced investor confidence but also shifted the focus from Gross Merchandise Value (GMV) to profitability as the primary valuation metric.

Breaking down the key points of the report, Zomato has managed to reach Consolidated Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) break-even three quarters ahead of its initial target, accomplishing this feat in Q1FY24 instead of the originally projected Q4FY24. This achievement is attributed to a consistent increase in contribution margins over the last six quarters, which now stand at 6.4 percent of Gross Order Value (GOV). The report establishes a long-term projection for contribution margins within the range of 8-9 percent and an Adjusted EBITDA margin of 5 percent. Zomato's cash balance remains healthy at Rs 11600 crore.

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The food delivery segment has shown considerable strength, with Gross Order Value (GOV) growth of 11 percent quarter-over-quarter in Q1FY24. The report foresees a sustainable compound annual growth rate (CAGR) of 24 percent year-over-year over the next three years, primarily driven by the addition of new monthly transacting users and increased order frequency. Analysts believe that Zomato is well-positioned to maintain high-teens growth in food delivery, coupled with continuous improvements in contribution margins. Recent stake sales Tiger Global and Softbank
have brought in long term investors with increased focus on profitability earnings.

Also Read: Tiger Global Management offloads Rs 1,123.85 cr shares in Zomato, exits startup

Additionally, the report highlights the positive developments in Zomato's Quick Commerce business, particularly Blinkit. Blinkit has achieved contribution margin break-even, with management guiding towards Adjusted EBITDA break-even within the next four quarters. Blinkit's Gross Order Value is expected to grow by more than 20 percent quarter-over-quarter, with a significant reduction in contribution margin percentage losses (0.6 percent compared to 2.7 percent in the previous quarter). Bernstein values Blinkit inline with the Food delivery business.

In light of these performance metrics, Bernstein has expressed optimism regarding Zomato's future prospects. They maintain an "Outperform" rating on Zomato and have raised the target price (TP) to Rs 120, representing a 20 percent upside potential. The company is now valued at 35 times the estimated EV/Adjusted EBITDA for FY25.

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