Moneycontrol Pro Panorama | Will Zomato deliver profit anytime soon?

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It is the rare, and brave, sell-side analyst who makes a contrarian call. The folks at Jefferies have done just that — They have announced a target price of Rs 100 per share for Zomato when its shares are plunging.

At the time of writing, Zomato shares are almost 9 percent lower at Rs 43.4 following Monday’s fall of 14.3 percent.

The fall in the share price was not unexpected since the one-year lock-in period for investors who had bought Zomato shares before its initial public offer expired on Saturday. Zomato has no promoters and many of its investors are venture capital funds whose mandate doesn’t include extended holding periods in listed companies.

The Jefferies analysts have rated Zomato as a high conviction buy. Why?

For starters, the Jefferies report says the food delivery industry has consolidated in India, and the worst of the competition is behind us (read: heavy discounts). Tight liquidity conditions will also force Zomato and its key rival Swiggy into cash conservation.

Second, they see better unit economics and a break even in food delivery in “the foreseeable future.” Losses at the EBITDA level have been trending down and this will get better as food delivery companies cut discounts, increase take rates, lower customer acquisition costs etc. Moreover, they point out, Zomato’s contribution margin has turned positive — in other words, the sales value for each delivery order exceeds the variable cost for that order.

The analysts have modelled for a 30 percent annual growth in Zomato's gross order value from FY22 to FY26. This is expected to be driven by a rise in the average monthly transacting users from 14.7 million in FY22 to 36.2 million in FY26.

The key problem is Zomato’s acquisition of Blinkit. We had pointed out earlier that the numbers don’t add up. What does the Jefferies report have to say about it?

It speculates Zomato’s acquisition may have been driven by FOMO, or the fear of missing out on the rush in this space and acknowledges that Blinkit will likely remain a cash guzzler in the medium term. The analysts have derived comfort from the management’s claim that it will reach profitability in quick commerce as order density per dark store (the place from where orders are serviced) increases.

This is all well and good, but when is Zomato turning profitable?

In FY26, according to Jefferies, Zomato will finally turn EBITDA positive and also report profit after taxes.

Profits for a startup!  Like the rare contrarian sell –side analyst, that too is seldom seen among start-ups who believe in growth at any cost.

For investment ideas on companies that are profitable, do look at these research notes from our independent equity research team:

Tech Mahindra – Margin nosedives, commentary positive

Axis Bank Q1 FY23: The bank pivots for a profitable journey ahead

UltraTech – Margin guidance casts a shadow on Q1 optimism

Crompton Greaves Consumer Electricals: Strong growth across segments in Q1

Sharda Cropchem: Earnings pressure to sustain in near term

Navin Fluorine: Diversification away from agrochemicals to set it apart

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Technical Picks: Gold mini, Tata Power, Jindal Steel, Brigade and Anantraj Global (These are published every trading day before markets open and can be read on the app)

Ravi Krishnan
Moneycontrol Pro ​