Zomato – Should you order?

 Slow industry and aggressive competition may impact growth in
3Q23, but profitability should continue to improve
 High competitive intensity may restrict further profitability gains
in 2023; growth acceleration is more critical anyway, we believe
 Blinkit business will continue to contribute more to the Zomato
valuation in 2023. Maintain Buy (TP INR87 from INR90).
3Q23 is likely to be a tough quarter, but all eyes should be on 2023 industry
growth: In our regular discounting checks (exhibit 1-5) we are seeing discounts holding
broadly stable for Zomato, but increasing for Swiggy, particularly in tier 2 towns. In
addition, Swiggy continues to discount delivery charges though its “SwiggyOne”
proportion and that is likely to put pressure on market share for Zomato in 3Q23 (recall
that Zomato has consistently gained market share from 2019 to 1H2022 – exhibit 6).
On top of that, we believe FD industry growth is likely to be weak in 3Q, taking readacross from QSR growth trends in 3Q and also some likely spending shift in favour of
dine-out. This would mean that, despite the positive seasonality of 3Q, Zomato’s gross
order value (GOV) growth is likely to be mediocre in 3Q (nearly flattish). Positively though,
we expect further improvement in profitability in 3Q (though moderate when compared to
the sharp improvement in 2Q).
Beyond 3Q, aggressive competition (Swiggy) and slowing industry growth will likely
restrict further improvement in profitability for Zomato in 1HFY24 (in line with our view –
see Zomato: Buy: Profitability improvement trend should continue, 21 Sep ‘22). Hence, in
2023, industry reacceleration and Zomato’s response to Swiggy’s aggressive go-tomarket strategy will be key for the stock. Zomato is relaunching its loyalty app “Zomato
Gold”, which will restrict further contribution margin (CM) improvement in the near term.
On a separate note, contrary to consensus expectations we believe Blinkit will be an
important business for Zomato in the long term and that consistent growth in GOV and
profitability in 2023 will support the stock price. We expect continuous strong growth in
GOV and profitability in 3Q23 for Blinkit as well.
Discounting trends for Zomato and Swiggy: Our analysis of discounting data for over
100 restaurants that we track (across 3 metros and 2 non-metro towns) indicates that
discounts for both companies are now lower than last year, but have been broadly stable
over the past 2-3 quarters. While we have seen some reduction in discounting vs Oct ’22,
we believe this could be attributed to festive discounts being wound down. We also note
that Zomato has been on average more disciplined in pulling back discounts, especially in
non-metro towns where Swiggy’s discounts are higher than Zomato’s.
Valuation and change in estimates: We trim our estimates for Q3 and now assume flat
GOV growth, with modest sequential recovery in Q4. We also reduce MTU growth for
FY23/FY24e, and increase order frequency/month, leading to a lower GOV CAGR (20%
vs 25% earlier). This yields a TP of INR87 on DCF (INR90 earlier).