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Analysis: What’s happening with Zomato?

16 March 2022
4 minutes

Zomato, an online food delivery company, had been making headlines for different reasons since the time it had filed for its IPO. Recently there are media reports that this food delivery company has signed up for merger talks with Blinkit (formerly known as Grofers), an online grocery delivery platform.

Zomato on Tuesday (Mar 15, 2022), in an exchange filing, announced an investment of $150 million into Blinkit in form of debt. This is to help the struggling grocery delivery company to meet its dues. The loan will be disbursed in multiple tranches with a 12% annual interest rate.

But the share of Zomato is down nearly 8% in the past week and down by 46% in the past six months. This blog will talk about why the stock of Zomato is falling and the primary reasons behind it.

While this is not a specific case with Zomato, almost all the recently listed tech stocks have had a similar fate. These include Paytm, Nykaa, PB Fintech and CarTrade. In the recent corrections amid the global sell-off, these new-age tech stocks took a hard hit. According to many market experts, these stocks were overvalued during IPO and one of the key reasons for the underperformance.

At present, the stock of Zomato is trading around Rs 76 per share as of March 16, 2022.

Let’s try to understand the company better, so you as an investor can make an informed decision about buying or selling the stock.

Why is Zomato’s share price correcting?

With concerns about the increase in inflation, the upcoming Fed Meeting and the anticipated announcement of rate hikes, US and Indian stock markets are in a declining phase.

Though there is some recovery in the markets, with the likely increase in rate hikes, investors of tech stocks are on sell-off mode in other stock markets as well and not just in India as per various media reports. This is among the key reasons for the fall in Zomato share price.

This apart, there are other factors too that could add to the correction of the stock. Tight competition from other players such as Swiggy, restaurant operations and the high valuation of the stock.

But having said that, Zomato is backed by large funding, a growing delivery market and a recognised brand so restaurant tie-up is easier leading to market share gains. Many experts are divided on the right valuation of the stock.

Zomato’s business 

Now that you have a picture of what may or may not be working for Zomato’s stock price, let’s understand its business better to have a holistic view.

Zomato is in the food delivery business where it links the customer and the restaurants. It earns 90% of revenue from this segment as commission from the restaurants. It also earns revenue from advertisement (within the app) and pro membership (it contributes to a minor portion of the revenue).

Zomato, at present, operates nearly in a duopoly market with Swiggy being the other main competitor. Considering the whole of the country is yet to receive internet access, leaving room for expansion. 

Here is why Zomato is well-positioned to increase its market share: Key points

  • Zomato’s growth depends on the customers. That is, active users and how much they spend. The company had been making steady progress on this front. Its average monthly transacting users have increased from 8.4 million during October to December quarter in 2021 to 15.3 million during the same quarter this year. The company’s new users too had been steadily increasing. As of the recent December quarter, its new users 5.5 million. According to various reports, with an increase in internet penetration, this segment is likely to grow. Thereby, benefits the company as well.
  • The lifting of lockdown and control restrictions have greatly favoured the company. The order value of food orders has been on the rise. Zomato’s gross order value was up 84% y-o-y during December quarter of FY22. According to the management, this growth was driven by an increase in the number of transacting users, a number of active food delivery restaurants and delivery partners. With many enjoying the comfort of home, the delivery business is likely to increase. Additionally, with many trying to access quality restaurants online, it also bodes well for the company’s growth going ahead.
  • Scope for diversification. While Zomato is predominantly into food delivery, the company has been expanding, albeit at a slow pace. It delivers groceries and B2B segments where the company supplies meat and vegetables and warehousing services.

Financials

While Zomato’s business appears intact with bright prospects going ahead, it is still a loss-making company. During the quarter that ended in December 2021 (FY22), the company reported a loss of Rs 67.2 crore. But it narrowed from a loss of Rs 352.6 crore same period last year. The loss was mainly due to high employee costs, and exceptional items. 

On the other hand, the revenue of the company increased significantly. In the nine months ended in December 2021 (FY22), the revenue stood at Rs 1,112 crore, up from Rs 609 crore in the same period last year. A jump of 84% y-o-y. 

The recent loan extension to Blinkit or its likely acquisition or acquisition of Mukunda Foods may stretch its balance sheet. But keep in mind that the company is well funded by the investors. 

Research Analyst: Bavadharini KS

To read the RA disclaimer, please click here.

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