I have been flip flopping in my head several times about the growth vs valuation of Zomato. On one hand it looks optically expensive and on other hand sheer growth numbers coming out of Blinkit especially prompt me to rethink again and again on the business. So I did some more work to come up with what is the thesis and anti-thesis going in my head -
Thesis
- Food delivery GoV growth expected to be 20% for 2-3 years
- Food delivery Adj. EBITDA to be 5% in medium term
- So in 3 years, GoV can be 60K Cr with 3000 Cr Adj. EBITDA from food delivery
- Growth to be driven by expansion in serviceable areas majorly, leading to increase in MTUs, ordering frequency and AoV increase will be other minor drivers.
- Blinkit GoV is currently 12500 Cr
- Zomato is planning to increase stores from 526 to 1000 in FY25
- GoV growth rates have been 80-90% driven by increase in orders (SSSG + geographical expansion) and AoV growth. Going forward geographical expansion in top 8 cities ex-Delhi is going to be key driver. Drivers for GoV growth -
- Dark store massive expansion 85% in FY25 itself
- SSSG growth rates itself can be 15-20% as they reported 17% SSSG increase in previous quarters
- Delhi is 40% of business and if other top 8 cities have to match the GoVs, then overall GoV can become 4x.
- While it is hard to come up with precise number of GoV growth in Blinkit, but give above info it can be anywhere 60-70% (15% SSSG + 50% expansion led)
- So the GoV of Blinkit can be 50K Cr atleast in 3 years
- Management says that in steady state adj. EBITDA can be 4-5%. But if we assume there will be some part of network ramping up in 3 years, lets take 2-3% as adj. EBITDA. This means 1000-1500 Cr can come from Blinkit as Adj. EBITDA
- So Zomato should do atleast 4000-4500 Cr adj. EBITDA in base case. (I have not assumed other businesses contributing anything for now)
- Now this Adj. EBITDA should largely flow to bottomline. Assuming 25% tax rate, the PAT could be 3200-3400 Cr. (Tax rate may be lower due to carry forward losses)
- Now question is, for a doubler, it should have 340K Cr MCAP by FY27. This means, it should have 100 PE in FY27 for the money to double from here on. I think if all plays out well by FY27, there is no doubt there will be clear margin expansion story with steady topline growth pending from there onwards as well. It could very well be 30-40% bottomline growth story 3 years out in FY27. Why would not market then give 100 PE to such consumer company growing PAT at 30-40%? Plus we don’t know optionalities that can come on radar as well with such large cash generating business.
Anti Thesis
- Competition in Q-commerce as E-comm players are entering into it. I think this is primary reason for such high and quick dark store expansion as Zomato wants to acquire customers asap in top 8 cities of India.
- Take rates deterioration in food delivery or Blinkit
- Market not allowing enough margin expansion headroom at some point
- Poor capital allocation calls and bad use of so much cash from the business
- Misaligned objectives of management and shareholders
- Management churn/exits
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