“One has to look at how Blinkit shapes up because in the company today, close to 85% of the losses are coming from the Blinkit business. If the Blinkit losses are included, the company is trading at valuations of close to 35-40 times EV/EBITDA, which is a fair valuation. The core food delivery business is a value proposition,” says Karan Taurani, Senior VP, Elara Securities.
There was excitement in the stock post the numbers and what Paytm indicated in terms of path to profitability. There was hope that Zomato would do the same. Are the Zomato numbers good, bad or in line?
Zomato numbers are in line. I would not say that they are excellent, but definitely they are in line. Basically, if you look at what they have been guiding the path to profitability in the food delivery segment, they are on the right track as we speak. The contribution margins are at 5.1%, and this is even higher than the peak of the pandemic levels, which was around 4.5%.
There was excitement in the stock post the numbers and what Paytm indicated in terms of path to profitability. There was hope that Zomato would do the same. Are the Zomato numbers good, bad or in line?
Zomato numbers are in line. I would not say that they are excellent, but definitely they are in line. Basically, if you look at what they have been guiding the path to profitability in the food delivery segment, they are on the right track as we speak. The contribution margins are at 5.1%, and this is even higher than the peak of the pandemic levels, which was around 4.5%.
If one looks at what has happened this quarter, clearly in the last two, three quarters, we are seeing trends wherein they are trying to focus less in terms of growth and focus more in terms of profitability. They are trying to mine the customers which are loyal in nature to increase frequency. So these are two big drivers – revenue growth being in the range of 25-30%, and profitability increasing consistently on a quarter-on-quarter basis. These are two multiples for the food delivery business. They are basically trying to exit markets where they are making losses. So there is a clear focus in terms of driving efficiency, reducing delivery charges and exiting loss- making markets. That is a good thing for the company.
Is Zomato a buy or a hold according to you?
At these valuations, Zomato could be a compelling buy because in the last three months, stock price has come down by 25-30%. In terms of EV/EBITDA valuations just on a forward basis and assuming that they achieve this 4-5% of EBITDA as a percentage of GOV, what they have been guiding for over the next two to three years.
The stock is currently trading at somewhere around 25-28 times EV/EBIDTA for the food business. So there is value buying here as far as the stand-alone food delivery business is concerned.
But one really has to look at how Blinkit shapes up because that is very important. In the company today, close to 85% of the losses are coming from the Blinkit business. One does not know the unit economics of this business and how it is going to pan out. The AOVs are high, the frequency is high, the order growth is fine today but once Blinkit scales up beyond three or four cities or maybe goes more in terms of the tier-2 and tier-3 towns, will the economies sustain and where will the losses be? If you include the losses of Blinkit, the company is trading at valuations of close to 35-40 times EV/EBITDA, which is a fair valuation. But the core food delivery business, is a value proposition.
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