Why Zomato’s profit path is rocky

“Zomato should see strong revenue growth of 70% on a year-on-year basis (5% quarter-on-quarter) led by Blinkit integration in the March quarter. However, net losses are likely to rise sequentially owing to expansion-led costs in quick commerce business,” said Rahul Jain, analyst at Dolat Capital Market.

In the December quarter, which is the first full quarter of Blinkit’s consolidation, Zomato’s net loss stood at ₹347 crore. However, it helps that Blinkit’s adjusted Ebitda loss had narrowed in Q3 sequentially.

In the past few days, news reports have said that Blinkit’s delivery executives in the National Capital Region (NCR) are on strike owing to a change in the pricing structure. These strikes had led to about half of Blinkit’s dark stores in NCR being shut down. Reports point out that Blinkit aims to move from a fixed-fee model of ₹25 per delivery to a hybrid pricing structure of ₹15 per delivery, and an additional incentive based on distance travelled. Delivery agents were disappointed with this development.

According to an ICICI Securities report dated 17 April, “Given that at least 3-4 days’ sales have already been lost, this implies about 1% loss in revenue from Blinkit and about 0.15% of consolidated revenue for Q1FY24—already.” The change in delivery fee structure shows Zomato’s focus on cost control. “In our view, this would allow Blinkit to increase the delivery radius for their existing dark stores and thus improve its network coverage with limited capex spends,” the ICICI Securities’ analysts said.

Meanwhile, on the other hand, the operating metrics of Zomato’s core business, food delivery, is a key monitorable. Demand slowdown seen post Diwali is unlikely to have seen a stronger recovery. Thus, the gross order value in the March quarter is likely to be subdued. This is despite the positive bearing from Zomato Gold. On the back of this, it remains to be seen if the improving trajectory of contribution margin continues. Recall that the December quarter had marked the fourth consecutive period of rise in contribution profit as a percentage of gross order value. To be sure, analysts reckon cash generation is still a couple of years away.

“While we believe the Zomato Gold loyalty programme would help faster pick up in delivery volumes, average order value is likely to drop to its medium to long term average over next couple of quarters,” Jain added.

Note that the online food delivery market is a duopoly with Zomato’s market share at 55% in the half-year ended September. Zomato would grow but duopoly may delay scale gains, said analysts at Motilal Oswal Financial Services. “We view the limited distinction between Zomato and Swiggy’s offerings— both having food delivery, dine-in and quick commerce—as a concern. A split market without a clear leader would hit margins due to absence of efficiency gains from order bunching,” said the Motilal Oswal report. The brokerage forecasts Zomato to report 29% CAGR in revenue over FY23-25 aided by its dominant presence in the sector.

All said, a pick-up in consumer demand is crucial to drive meaningful improvement in the food delivery business’ operating metrics. Further, Zomato’s progress towards its aim of meeting its guidance of breaking even at the adjusted Ebitda level, excluding Blinkit, by Q2FY24 could lift investor sentiments.