Zomato’s road to profitability over the next three years requires two things, analysts say

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  • Although Zomato’s sales have increased, the food delivery giant is still unable to turn a profit due to huge costs caused by discounts and marketing.
  • It posted a net loss of ₹1,222 crore for the March quarter, up nearly 50% from last year.
  • However, analysts believe the food delivery business has huge potential as it is estimated to be a $110 billion opportunity by 2025.
  • Both Zomato and its rival Swiggy together have 90-95% market share in the Indian food delivery business.

Food delivery company Zomato has been reeling under pressure to become profitable since July last year.
the day it became public and raised over ₹9,000 crore from the public. Since the IPO, Zomato investors have seen their assets plummet by half, and it doesn’t look like they’re going to stop just yet.

Brokers believe that in a few years the company may have an opportunity to lure investors as there is a huge opportunity ahead of them.

According to a report from JM Financial, Zomato’s path to operating profitability (also known as EBITDA profitability) requires two things.

EBITDA is an abbreviation for earnings before interest, taxes, depreciation and amortization.

“We believe that order volumes and contribution margin per order are two key variables that would determine Zomato’s path to profitability. Our analysis suggests the company could become profitable in FY25 on a cash EBITDA basis if it reached annual order volumes of 1 billion (2.5x FY20 levels) and a contribution margin of approximately ₹21 per order,” the report said.

In addition, the report says an increase outside the food ecosystem can also drive incremental growth.

It expects Zomato to follow global peers in terms of expanding beyond food delivery and exploring adjacent territories in the form of grocery delivery, alcohol delivery, drug delivery, on-demand delivery and insta shopping. The recent investment in Grofers and a majority stake in Fitso is confirmation of expansion into neighboring areas, the report said.

Gen Z population offers attractive growth opportunities for Zomato
The number of online shoppers in India is expected to grow to 300-350 million in FY25, from 100-110 million in FY20, according to Bain & Company.

“With approximately 10 million monthly active users, the current penetration rate for Zomato among online product shoppers is approximately 10%. We expect this penetration to increase to approximately 15% over the next 5 years, effectively increasing Zomato’s monthly active user base to 45 million in FY26,” the report said.

The brokerage expects growth to be driven by the growing share of millennials/Gen Z in the “earning” population and burgeoning e-commerce penetration outside of Tier-1 cities.

Customer addition remains strong, but 9 out of 10 orders are from old users

New customer acquisitions by Zomato remained strong in January-March with approximately 5.5 million new additions. However, over 90% of its food delivery business is driven by repeat users compared to new users.

“The company expects its near-term growth to be driven by repeat customers as there is significant room for improvement in the average annual order frequency (which is approximately 10 per user per year),” said JM Financial’s report.

Zomato now operates in over 1,000 cities across India as it added 300 plus new cities in January-March. Top 8 cities contributed approximately 60% to gross order value. However, losses continue to mount and increased by nearly 50% to ₹1,222 crore in the March quarter, compared to the previous year.

Some analysts believe that the company’s performance must change quickly to turn the loser’s story around.

“With the current inflation, margins will continue to fall due to increased costs of fuel, raw materials, etc. Acquiring several companies will not help the expansion much, rather it will complicate management,” said Majoj Dalmia, founder and director at Skilled Stocks.

“Existing management needs to be optimized for profitability; the growth outlook will depend on current performance and not on the future, if we turn around now we can expect a good growth story,” he added.

$ZOMATO.NSE Zomato delivers the food on time, but not a good return for the holders, structure at the moment is week. Any increase is only possible if closed above 76 and sustained for at least 2 days. See the chart below for a detailed analysis.

— (@Swapnilkommawar) 09 June 2022

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