As Zomato stock gains 10%, investors say the first net profit is always special

In this backdrop, investor excitement is understandable. Zomato’s shares surged by nearly 10% on Friday on the NSE.

“This puts to rest all the concerns around Zomato’s ability to make ‘respectable’ profits. Results also give more credibility to the management & its execution prowess, which is particularly positive for Blinkit which most investors ascribe zero (or negative) value," said analysts at Jefferies India in a report on 3 August.

Zomato has also addressed concerns about the slowdown in the food business. In Q1, the gross order value (GOV) in the food delivery business rose by 11.4% sequentially to Rs7318 crore. For perspective, the sequential growth in Q3FY23 was a mere 0.7% while GOV declined by 1.6% in Q4FY23. Of course, the better-than-guided GOV growth in Q1 was helped by seasonal factors such as summer vacation and the Indian Premier League.

Zomato notes that the demand environment is recovering, and it is seeing increasing adoption of its loyalty programme, Gold, which led to a higher frequency of ordering. The program contributed more than 30% to food delivery business GOV. It is worth noting here that despite the Gold program, Zomato’s contribution margin has inched up. The measure rose to a multi-quarter high of 6.4% in Q1 led by higher take rate.

“While we acknowledge that Zomato is likely to achieve its target of 4-5% Ebitda margin (as a % of GOV) earlier than our expectation, we continue to believe that it will be a challenge to achieve double digit contribution margin, with high growth in the long term," said analysts at Nomura Financial Advisory and Securities (India) in a report on 3 August. “High growth with margin expansion to be a challenge," added the report.

Coming to Blinkit, the business is still in the red at the adjusted Ebitda level. Q1 was impacted by temporary business disruption in April due to the change in delivery partner payout structure. As a result, some of the dark stores were shut for a few days thus weighing on overall order volumes. However, the momentum has picked up since June and Blinkit is likely to break even at the adjusted Ebitda level in the next 4 quarters.

Overall, Zomato aims to remain profitable in the upcoming quarters and clock more than 40% year-on-year growth in adjusted revenue for at least the next couple of years. Investors would do well to track progress on this. In Q1, adjusted revenue was higher by 54% year-on-year.

After accounting for today’s rise, shares of Zomato are up by nearly 61% in 2023 so far. Hereon, Blinkit turning profitable would be a key catalyst. However, investors will also watch if the growth in the food delivery business sustains.