Street willing to bet purely on Zomato's topline growth after Q1 results

In Q1FY22, losses also expanded due to non-cash ESOP expenses, which will continue going forward

The bullish share price movement in Zomato indicates investors are willing to bet purely on topline growth. The food delivery service went public with an over-subscribed IPO in July 2021 and listed at a premium of 50 per cent to its IPO price of Rs 76 per share.

The latest results indicate revenues are growing but so are losses. In Q1FY22, there was consolidated net loss of Rs 356 crore, versus a loss of Rs 99.8 crore a year ago and a loss of Rs 153 crore in Q4FY21. Revenues rose to Rs 844 crore as compared to Rs 266 crore YoY, and Rs 692 crore in Q4FY21 (QoQ). The operating losses (PBDIT) would have been around Rs 360 crore. Depreciation is being charged at around Rs 35 crore per quarter. The share price rose as revenues beat expectations comfortably.

The growth was from the food delivery business. The second Covid wave has hit dining out at restaurants. Revenues of Rs 807 crore came from India, with most overseas revenues (Rs 32 crore) from the UAE. The Gross Order Value was at Rs 4,540 crore, a record.

Employee Benefits amounted to Rs 390 crore, versus Rs 159 crore (YoY) and Rs 192 crore (QoQ). This was largely due to 368 million in stock options issued to Deepinder Goyal in April, at an aggregate fair value of Rs 1,363 crore.

The company said: “Adjusted EBITDA loss was Rs 170 crore in Q1FY22, compared to Rs 120 crore in Q4FY21. The loss for Q1FY22 reported in our financial statements is Rs 360 crore as compared to the Adjusted EBITDA loss of Rs 170 crore. This is largely on account of non-cash ESOP expenses, which have increased meaningfully in Q1, FY22 due to significant ESOP grants pursuant to creation of a new ESOP 2021 scheme. This divergence in reported profit/loss and Adjusted EBITDA will continue going forward.”

Zomato defines Adjusted Revenue and Adjusted EBITDA as Adjusted Revenue = Revenue from operations as per financials + customer delivery charges, and Adjusted EBITDA = EBITDA less share-based payment expense, while EBITDA = Profit/loss excluding (i) tax expense (ii) other income (iii) depreciation and amortisation expense (iv) finance cost and (v) exceptional items.

Given the IPO, Zomato can easily sustain the cash-burn for many years. Investors are betting on it to take more market share in a business slated to grow at a CAGR of close to 40 per cent (according to CLSA).

Apart from restaurant commissions, which is the primary revenue stream, delivery fees, membership fees for Pro users, and listing fees for restaurants are other streams. There is potential for geographical growth but this could be slow given the pandemic. Zomato has also moved into sourcing and delivering ingredients to restaurants.

It’s hard to ascertain if the number of regular monthly users has grown. Along with gross order value, and average order value, which is not available from the limited information in the quarterly statement, this is a key variable.

There are three food-tech majors including Zomato and Swiggy (still unlisted) and Amazon Food, which is now in specific pin codes. Zomato can be treated like a high-risk, long-term bet, which could be a multi-bagger. Or it can be considered a trade, which could yield quick profits, if it’s timed well.