Markets
After delivering in Q1, all Zomato needs is to sustain the good run
Summary
Zomato had earlier guided that it would turn net profit by Q4FY24. While it is true that Zomato has seen improvement across key operating and financial parameters, a tax adjustment helped it report a net profit of ₹2 crore in Q1.Zomato Ltd clocking its first ever consolidated net profit in the June quarter (Q1FY24) is a milestone. In response, shares of the online food delivery company jumped by 10% on Friday.
Zomato had earlier guided that it would turn net profit by Q4FY24. While it is true that Zomato has seen improvement across key operating and financial parameters, a tax adjustment helped it report a net profit of ₹2 crore in Q1. Before tax, Zomato’s loss was ₹15 crore. But analysts are not losing their sleep over it. “Zomato’s execution prowess gives us confidence that the company would clock profit before tax within the next two quarters," said Nikhil Choudhary, assistant vice president, Nuvama Institutional Equities.
Last quarter, Zomato also put up a good show on the margin front. In the food delivery business, gross order value (GOV) grew by 11.4% sequentially to ₹7,318 crore. Adjusted Ebitda as a percentage of GOV stood at 2.5% in Q1 versus 1.2% in Q4FY23 led by factors such as higher take rate.
Of course, it remains to be seen if Zomato can simultaneously deliver on growth and expand its margin substantially. It expects to get to 4-5% of adjusted Ebitda as a percentage of GOV in a few quarters. Zomato also notes that executing on margin improvement would get tougher as it nears the guided range.
Thus, it is encouraging that the demand is recovering.
Coming to Blinkit, losses are shrinking but the business is still in the red at the adjusted Ebitda level. The company aims for Blinkit to break-even at the adjusted Ebitda level in the next four quarters.
Overall, Zomato expects to be 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.
This provides good visibility. However, some are cautious.
“Robust performance and commentary in Q1 has led to significant uptick in our forecasts but nevertheless we continue to mark the growth way below guided rate given past volatility, and would rather wait to see current traction sustaining," said analysts at Dolat Capital Market in a report on 3 August. The broking firm has raised overall revenue estimates by 5.7%/5.2%for FY24/25.
To be sure, shares of Zomato have risen by nearly 61% in 2023 so far.
It is crucial for the food delivery business to maintain its growth trajectory to keep investor sentiments intact. Investors will closely watch the progress on meeting stated targets.
