Zomato Q3 results: Target price cut post muted Q3; long-term outlook intact

Analysts have cut target price on Zomato shares after the food delivery company posted a muted December quarter (Q3FY22). At best, they expect the shares to deliver about 74.64 per cent returns in a year, hitting Rs 155-mark during the period. Earlier, the highest 1-year target price on Zomato was Rs 185.

"After a strong Q2FY22, an underwhelming gross order value (GOV) in Q3 will raise questions on India opportunity. Earnings release remains opaque, lacks substance, and describes only selective aspects of the business. Following a weak Q3, we reduce price target to Rs 120," said Vivek Maheshwari, equity analyst at Jefferies, in a co-authored report with Jithin John and Kunal Shah.

Analysts at Morgan Stanley, meanwhile, added a lack of growth in monthly transacting uers (MTU) sequentially and a slowdown in GOV (even after adjusting for lower delivery charges) more than offset the positive from lower burn rates QoQ and could limit the stock price in the near-term. CLICK HERE TO CHECK REVISED TARGET PRICES

The GOV grew by 84.5 per cent year-on-year (YoY) and 1.7 per cent quarter-on-quarter (QoQ) to Rs 5,500 crore in Q3FY22. The number of orders, meanwhile, grew 93 per cent YoY and 5 per cent QoQ.

Average order value (AOV) shrank around 3 per cent QoQ, mostly on account of reduction in customer delivery charges (CDC). Zomato had reduced customer delivery charges by Rs 7.5 per order, resulting in a 22-per cent sequential contraction in CDC in Q3.

According to the company, part of the reduction in customer delivery charges is also because it started operations in around 180 new cities (the company is now in a total of more than 700 cities), where it has introduced temporary free delivery to cultivate a culture of ordering food from restaurants.

"We believe that the weaker-than-expected around 2 per cent QoQ growth in GOV was primarily due to reduction in customer delivery charges as well as lower customer addition in the wake of post-Covid reopening (loss of business to dine-in). Contribution margin (as a per cent of GOV) was 1.1 per cent in Q3FY22 (vs 1.2 per cent in Q2FY22), again impacted by lower delivery charge," explained analysts at Kotak Institutional Equities.

Overall, Zomato saw its net loss narrow by 81 per cent YoY to Rs 66 crore, while its revenue rose 86 per cent YoY to Rs 1,112 crore in Q3FY22. On a sequential basis, the foodtech company saw its revenue rise 9 per cent from Rs 1,024 crore in Q2, whereas net loss slimmed by 85 per cent from Rs 430 crore in Q2.

Analysts have trimmed earnings expectations after the muted Q3FY22 result with KIE cutting its revenue forecast for FY22, FY23, and FY24 by 2.3 per cent, 4.9 per cent, and 4 per cent, respectively. Ebitda loss expectations have also increased by 5.3 per cent, 6.2 per cent, and 7.2 per cent for the respective years.

"After a positive surprise in MTUs and GOV resulting in sharp upgrades in Q2, we now cut the FY22-26 GMV by 4-9 per cent to reflect the muted performance in Q3. We now trim growth, but raise profitability,” said Jefferies.

On the bourses, shares of the company dropped 9 per cent to Rs 85.85 on the BSE in Friday's intra-day, reaching close to their record low level of Rs 84.10, hit on January 25. They closed 6 per cent lower at Rs 8875 per share as against a 1.3 per cent fall in the benchmark S&P BSE Sensex.

New investments and way forward

Zomato said it will continue to invest both in its core food business and in quick commerce, and raised the upper bound of potential investments in this category to $400 million cash over the next two years.

It is also in the process of setting up a non-banking financial company (NBFC), which will help it provide credit to customers, restaurants and delivery partners.

The company said it has around $1.7 billion of cash on its balance sheet and has made investments worth around $225 million in the past year across three companies — Blinkit (erstwhile Grofers), Shiprocket, and Magicpin.

According to Swapnil Potdukhe, equity research analyst and assistant VP at JM Financial, a significant chunk of this amount could go to Blinkit, which is pioneering the 10-minute grocery delivery format.

"We remain optimistic on such hyper local ecosystem investments (beyond core food delivery) as they could lead to bundled offerings that would not only help it improve customer engagement, retention and ordering frequency but also drive operational synergies," he said in a co-authored note with Sachin Dixit and Manik Taneja.

That said, Zomato's long-term growth story remains intact as it is a play on the growing food services industry in India as well as increasing adoption of digital commerce.

"With only 10-11 million monthly transacting users currently, Zomato has a long run-way for customer acquisition and revenue growth, albeit this may come at the cost of near-term profitability," said analysts at Jefferies.

Those at JM Financial added: We remain bullish on the company’s long term growth prospects as it is well-positioned to benefit from robust industry tailwinds such as improving tech penetration and rising income share of digitally native millennials / GenZ.