The relaunch of Zomato’s membership programme and its likely impact on the food delivery vertical’s profitability, going forward, continues to intrigue the Street, highlighted brokerage JM Financial. While the management believes that the short-term negative impact of free deliveries will be offset by improvements in other revenue and fixed & variable cost drivers, the complexity in forecasting margins keeps the debate raging.
“Basis the initial feedback from a small sample set of customers and the management commentary of visible green shoots in the form of an increase in app opens post the launch, we believe, ceteris paribus, that the Gold launch should certainly drive up order volume. We also believe that the company has enough levers both on revenue (restaurant commission take-rates and ad income) as well as variable cost (such as closure of operations in 225 cities that were loss-making and delivery partner-related efficiencies) that should partially (if not entirely) negate the impact of the free delivery benefit for Gold members,” the note stated.
JM Financial continues to remain bullish on the company’s long-term prospects in the hyperlocal delivery space as we believe it is well positioned to benefit from robust industry tailwinds such as improving tech penetration and rising income share of digitally native millennials / GenZ. Balance sheet also remains robust with net cash of ₹113 bn as of December 2022.
The brokerage house said Zomato remains a long-term story and has Buy rating on Zomato shares with a target price of ₹100 apiece, implying a potential upside of more than 95% from the current stock level.
“We raise our FY23-25 revenue estimates by 3-6% mainly due to strong beat in the Hyperpure business. Simultaneously, we raise our EBITDA margin estimates by 160 bps/220 bps over FY23/FY24 due to lower-than-estimated operating losses in 3QFY23,” it added.
The online food delivery platform reported a widening of consolidated net loss at ₹346.6 crore for the third quarter ended December 2022 impacted by higher expenses and slowdown in food delivery business, as against loss of ₹67 crore year-on-year (YoY).