Buy Zomato of Rs 90: Emkay Global Financial

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Emkay Global Financial's research report on Zomato

Zomato reported a mixed operating performance in Q3 – while it registered a disappointing muted GOV, contribution margin in food delivery and Hyperpure revenue growth beat expectations. Food-delivery GOV grew 0.7% QoQ/21% YoY to Rs66.8bn, impacted in an otherwise seasonallystrong quarter due to an industry-wide post-Diwali slowdown, especially prominent in the top-8 cities. Food-delivery adj. revenue declined ~1% QoQ, largely due to fall in order volumes (~163mn vs ~164mn in Q2). The demand environment remains challenging owing to a few temporary factors: i) macro slowdown for the mid-market segment, ii) boom in dining-out for the premiumend category, and iii) boom in travel at the premium-end. However, Management has pointed to green-shoots of demand coming back in recent weeks. Management indicated that ex-quick commerce business achieved break-even in Jan-23 and sees a good chance of achieving adjusted EBITDA breakeven ex-quick commerce in Q4. The company reiterated its guidance of adjusted EBITDAM break-even by Q2FY24 despite the unexpected moderation in demand and launch of Zomato Gold. Management remains confident about achieving adjusted EBITDA margin of 4-5% of GOV, in the food delivery business in the medium term. Q3 performance strengthens our belief in the company’s ability to execute & deliver profitable growth, but growth moderation in MTU/GOV remains a concern.

Outlook

We maintain BUY, with TP of Rs90/share, based on SOTP methodology, comprising of the OFD business (ex-Blinkit), valued at Rs77/share using DCF the method, with cash and other strategic minority investments accounting for the remaining value.

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Zomato - 14 -02 - 2023 - emkay