Zomato’s profitability leap inspires investor confidence; Bernstein rates company as “outperform” 

After surpassing profitability goals ahead of schedule, Zomato, one of India’s top food delivery platforms, continues to inspire investor confidence, Moneycontrol reported.

The company’s exceptional performance is highlighted in a report published byprivate wealth management company, Bernstein, which provides financial advice toinvestors. The report points to elements like increased contribution margins and strong execution as major contributors towards Zomato'sachievements.

In addition to boosting investor confidence, this success has switched the emphasis from Gross Merchandise Value (GMV) to profitability as the key value criterion.

As per the report, Zomato has succeeded in achieving Consolidated Adjusted Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA) break-even three quarters earlier than its original plan, and did so in Q1FY24 rather than the originally anticipated Q4FY24.

Thisis due to a steady rise in contribution margins over the last six quarters, which are currently 6.4 per cent of Gross Order Value (GOV). The long-term prediction in the report is for contribution margins of 8 to 9 per cent and an adjusted EBITDA margin of 5 per cent. At Rs 11600 crore ($ 1.39 billion), Zomato’s financial position is quite strong.

With a Gross Order Value (GOV) growth of 11 per cent quarter-over-quarter in Q1FY24, the food delivery segment has showcased significant momentum. Over the next three years, the research predicts a sustainable compound annual growth rate (CAGR) of 24 per cent, driven primarily by the addition of new monthly transactional customers and elevated order frequency.

According to analysts, Zomato is in a good position to maintain food delivery growth, along with ongoing increases in contribution margins. Tiger Global and Softbank have recently sold stakes, attracting long-term investors with a focus on profitability and earnings.

The research also emphasises on the progress made towards Zomato’s Quick Commerce division, particularly Blinkit. With the management expecting an adjusted EBITDA break-even within the next four quarters, Blinkit has achieved a break-even contribution margin.

With a considerable decrease in contribution margin percentage losses (0.6 per cent compared to 2.7 per cent in the prior quarter), Blinkit’s Gross Order Value is anticipated to increase by more than 20 per cent quarter over quarter. Blinkit is valued on the same basis in relation to the food delivery industry by Bernstein.

According to these indicators, Bernstein is optimistic about Zomato’s chances moving forward. They have increased the target price (TP) to Rs 120 ($1.45), which would indicate a 20 per cent increase, while maintaining an “Outperform” rating on Zomato. The anticipated EV/Adjusted EBITDA for FY25 is now 35 times the company’s current market value.

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