Zomato needs its pot of gold

The slowdown in Q3 was owing to factors such as weakness in the mid-market segment and rise in dining out. This has caused a sequential drop in order volumes and average monthly transacting users (MTUs). Both these factors should worry investors.

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Zomato expects the slowdown to have bottomed out, it said in the earnings call on Friday. But how demand unfolds hereon remains to be seen. Efforts to revive growth are on. A key initiative being the launch of membership programme, Zomato Gold in late January. The success of Zomato Gold would go a long way in reviving growth. Partly owing to this, in the last couple of weeks, Zomato’s app opens have gone up. The company noted that the absence of such a programme had an adverse impact in the last quarter.

“We believe that declining order/MTU metrics clearly suggest that a large part of consumer adoption is incentivized,” said analysts from Dolat Capital Market. Zomato expects the Gold programme to help in converting annual transacting customers to monthly. This would boost the ordering frequency.

However, the programme would weigh on near-term profitability due to free delivery to Zomato Gold members on orders meeting certaincriteria. The extent of impact though needs to be watched as the company expects to negate adversities via increase in other revenue and cost optimization measures. Some analysts point out that the programme is likely to delay a continued recovery in contribution margin.

Add to that, Zomato’s strategy of exiting non-performing markets in the food delivery business helps. In January, it stopped catering to about 225 smaller cities, which contributed 0.3% of GOV in Q3 as these regions weren’t lucrative enough.

Against this backdrop, Zomato maintains its guidance of reaching 4-5% adjusted Ebitda as a percentage of GOV in the medium term in the food delivery business. In Q3, cost efficiency measures meant profit metrics were relatively better. The food delivery business saw a rise in contribution margin and also stayed positive at the adjusted Ebitda level.

Overall, Zomato reiterated its guidance of becoming adjusted Ebitda break-even, excluding quick commerce arm, 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. Blinkit’s losses narrowed in Q3 and GOV was up by 18% sequentially. However, this business is the main culprit of Zomato’s overall swollen losses. In Q3, Zomato’s adjusted Ebitda loss was ₹265 crore with the share of Blinkit’s loss at 85%. On the other hand, Blinkit’s revenue share was at only 13%.

“We continue to believe that this segment is highly fragmented with steep discounts and attaining profitability over the near to medium term may be a challenge therein, which in turn will also keep Zomato’s valuations under check,” said Karan Taurani, analyst at Elara Securities (India).

To be sure, with green shoots in demand in the food delivery business, meeting the guidance would be a key catalyst for the stock. Also, continued improvement in Blinkit’s metrics would aid investor sentiments. Currently, Zomato’s shares are 30% below their issue price of ₹76 during IPO in 2021.