Analyst Corner — Zomato: Retain ‘buy’ with slightly higher PT at Rs 175


Reported revenues grew strongly QoQ with revenues including delivery fees rising >25% QoQ, significantly ahead of our estimates.

Key takeaway: Zomato reported a strong beat on revenues led by +37% QoQ in GOV. Adj. EBITDA loss at Rs 1.7billion is also on expected lines — reported EBITDA loss is higher due to ESOP charge, which is non-cash and is built into share dilution.

Management release has interesting insights but lacks details on MTU, AOV & unit economics (provided in RHP), which could disappoint investors as could the decision of an annual earning call. We raise FY22-24E revenue by 10-20%; buy.

Overall revenues: Reported revenues grew strongly QoQ with revenues including delivery fees rising >25% QoQ, significantly ahead of our estimates. While delivery business was strong, dining-out was impacted by the second Covid wave. YoY numbers are very strong given the impact of first Covid wave in the base.

Record GOV: Delivery GOV rose 37% QoQ to Rs45.4billion ($600million) — this was led by highest-ever GOV, number of orders, MTU etc. We are disappointed with lack of disclosure on these key matrices and estimate number of orders at c.115m during 1Q.

Unit economics: Again, no details have been provided on the trend in discounts, delivery cost etc. We note that the IPO document captured all of these details to allow investors to track the performance & profitability over time. Management has just indicated that contribution margin reduced slightly, QoQ, due to higher discounts & delivery charges, in our view.

Ebitda loss: Adjusted for non-cash ESOP charge, EBITDA loss came-in at Rs 1.7billion cf. Rs 1.2billion in 4Q, which was broadly on expected lines. However, there has been a surge in reported loss at Rs 3.6billion as there is around Rs 2billion of ESOP charge.

ESOP = share dilution: While higher reported EBITDA loss may cause some concern, we highlight that this is non-cash charge and hence has no impact on cash flows.

Of course, there would be an impact on share dilution, which is what we have built-in our calculations, including in deriving our fair value for Zomato. We estimate c.8% dilution due to stock options in coming years — we have explained this in detail, ahead.

Delivery ecosystem: Following the lowest ranking in a gig economy worker survey, Zomato took corrective actions: a) improved payout structure with c.15% higher earnings versus LY; b) increase in cash limit, enabling fleet to utilise cash collected on COD orders; c) remote on-boarding; d) better communication on insurance benefits. NPS scores have improved and more work is underway. We see this as a positive step in the context of tightening regulations across countries and India may also see policy framework soon.

Our estimates: Following a strong 1Q, we raise FY22-24 revenue estimates by around 10-20%, primarily based on higher GOV (which in turn are based on higher MTUs).

We also raise our EBITDA loss estimates but continue to see break-even by FY25-26. We have also made changes in our model structure to separately account for ESOP charge from here-on and have also raised this. However, this has no cash flow impact and we already built-in 8% dilution. We retain ‘buy’ with slightly higher PT at Rs 175.


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