Zomato – Should you order?

Zomato is trading a P/E of 142 times with a market capitalization of INR 1.18 LAKH CRORE. Margins are hard to grow in this line of business with intense competition and pricing pressure, and the upside at this price point looks very limited.

I wrote a DETAILED article covering Zomato’s B-model + whether the stock offers a good investment opportunity – Zomato : a long term bet? – by Siddharth Bothra

Here’s my take on the Q2FY24 results:

Pros

• Zomato started charging platform fees (around INR 3-4 per order) in line with competition. Management expects platform fees to stay for the foreseeable future. Almost 100% of orders have platform fees now.
• Ad revenue increased on the back of increase in ad placed on Zomato. Ad revenue + platform fees helped contribution margin by 20 bps in Q2FY24
• Blinkit became contribution margin positive in Q2FY24. Could achieve EBITDA breakeven by Q1FY25. Blinkit GOV could be > than Food delivery business in the future. 480 dark stores expected by the end of FY24. Started selling iPhones and other electronics which could drive GOV up. (iPhones are excluded from GoV however)
• Expecting 25-30% growth in Food delivery GOV for Q3
• Key metrics: 18.4Mn MTUs, 3.8Mn Gold members, Average monthly ordering frequency up 3%, GOV up 47% [for Q2FY24]
• Sitting on a cash balance of INR 11,761 CRORE at the end of Q2

Cons

• Pace of Gold membership increase could slow down in future. Gold orders are lower contribution margin than non-Gold orders. Gold subscription only covers a part of the incremental costs incurred for privilege service provided to Gold members. Will continue to be a drag on margins.
• ESOP costs increased, might end with 450 crore of ESOP Expense for FY24 [I don’t believe in the concept of Adjusted EBITDA ]
• HyperPure didn’t see any positive movement in EBITDA. No commentary from the management on this line of business in general.
• Marketing costs were up 13-14% QoQ. Salary costs were up 20% QoQ due to salary increments generally carried out in Q2.

Zomato is doing a lot of things right, looks like a good business. But – margin expansion is difficult, without which the stock would continue to look expensive.

Disclosure: Not invested. Waiting for atleast a 30% correction from current levels to enter the stock.