Food delivery slowdown weighs on Zomato Q3; recovery to be watched

The company noted a slowdown in the food delivery business post Diwali and the growth in key metrics has been subdued. The gross order value in the food business was up by a mere 0.7% sequentially. This compares to about 3% and 10% sequential growth in Q1 and Q2, respectively. Moreover, the average monthly transacting customer growth was flat sequentially at 17.4 million in Q3.

“We think that the current slowdown is a result of a few temporary factors – a) macro slowdown for the mid-market segment, b) boom in dining out for the premium-end, and c) boom in travel at the premium-end,” said the company while announcing its Q3 earnings.

But there were some bright spots too. Contribution profit as a percentage of gross order value was at a multi-quarter high of 5.1% helped by cost efficiencies.

Overall, including the quick commerce business, Blinkit, adjusted Ebitda (earnings before interest, tax, depreciation and amortization) losses widened to Rs266 crore in Q3 from loss of Rs192 crore in Q2. Note that Q3 is the first full quarter of consolidation of Blinkit financials. Excluding Blinkit, losses at the adjusted Ebitda level were lower at Rs38 crore versus ₹60 crore in Q2. While it is comforting that the quick commerce arm continues to see improvement in key metrics such as orders and transacting customers, Zomato is still in the red at the adjusted Ebitda level.

Despite the slowdown, Zomato maintains its guidance of becoming adjusted Ebitda break-even excluding Blinkit by Q2FY24. In January, the company was break-even at the adjusted Ebitda level and notes a possibility of achieving this in Q4FY23 but this hinges on proper execution of its plans.

Note that the company launched Zomato Gold in late January, which would be a headwind at least in the near-term given the free delivery benefit that accrues to customers.

“Growth revival through relaunching the Gold loyalty program is likely to delay a continued recovery in contribution margin,” said analysts at Nomura Financial Advisory and Securities (India) in a report on 10 February.

To be sure, meeting the guidance would be a key catalyst for the stock, which is nearly 30% below its issue price of Rs76. Zomato believes that the worst is behind it as “we are seeing green shoots of demand coming back in the recent weeks.”