The biggest positive in Zomato Q2 is not in numbers, but in attitude

A little bit of honesty by companies usually goes a long way. This is even more true for immature businesses that are still trying to make their mark in developing segments.

Zomato, on November 11, reported improvement in financial performance on almost all fronts but the most remarkable part was how the company presented its numbers and what it said about its future plan, which can be a game changer.

The food delivery services provider restructured how it calculates its segment-wise earnings. Earlier, it used to report ‘Unallocated Costs’ – which included server and tech infrastructure costs, corporate salary costs and other corporate overheads – as a separate cost head not attributable to any of the business segments.

Though this practice did not change overall earnings performance, it impacted how segment wise performance looked. For instance, the company in Q1 reported that its food delivery business had broken even on EBITDA level. However, that hid the fact that the company did not deduct costs mentioned above from segment revenue, making the numbers optically more reassuring.

In Q2, the company has redistributed all these costs to their respective segments. “Based on feedback received from a number of shareholders, from Q2FY23 onwards we have allocated these costs to different business segments,” the management said.

Also read: Zomato Q2 loss narrows to Rs 251 crore, revenue jumps 62%

The company also readjusted numbers accordingly in previous quarters as well. The impact is visible. On adjusted EBITDA level, the food delivery business in Q1 now shows a loss of Rs 113 crore. The segment is now – in Q2 – break even, as per reported numbers, thanks to a meaningful improvement in contribution margins.

Zomato also made additional disclosure in regard to rent it paid on leases. In the past, adjusted EBITDA reported by the company did not include the rental expenses on certain leases, but it will now include the actual rent paid for the period under such leases in the Adjusted EBITDA to “more appropriately reflect (its) cash loss/profit”.

The impact of this change and improved numbers was also acknowledged by investors. On November 11, the stock jumped nearly 10 percent intraday to cross over 70 levels on the BSE.

The new age companies have not been famous for being the most transparent ones. Zomato itself has been criticised in the past for not disclosing some of the important information. Being the first ever listed new age startup, a little more honesty can set a new trend for others of the same breed.

Shifting perspective 

Whether due to pressure from shareholders or internal enlightenment, another significant change in mindset of the management was how they see future growth of the company. Zomato is now prioritising becoming profitable over growing larger.

“We have strategically chosen to trade low quality growth for better unit economics,” said Deepinder Goyal, Founder and CEO, Zomato. “That’s part of our long term strategy to build a high quality, high growth business.”

Also read: Loss or break-even? Zomato blinks months after claiming break-even of food delivery biz

He, however, said that Zomato will not shy away from investing behind high-quality compounding growth and continue to invest in long-term capability building, as well as market expansion initiatives like Hyperpure, Zomato Instant and Intercity Legends.

The company also reiterated that on the overall, it expects the adjusted EBITDA loss (ex-quick commerce) to come down further and eventually get to break-even in the next 2 to 4 quarters.

Analysts upbeat 

Analysts tracking the company maintained their bullish stance on the company’s shares.

Morgan Stanley had an ‘overweight’ rating on the stock with target price at Rs 80. Similarly, Jefferies, which applauded the management’s urgency to reduce losses, maintained its ‘buy’ call with a target at Rs 100 per share.

“We think the management’s guidance towards attaining EBITDA-breakeven for Zomato business by the first quarter would require careful calibration of employee expenses and marketing spends,” said Abhisek Banerjee, an analyst at ICICI Securities.

He has a ‘hold’ rating on Zomato with target at Rs 65.

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