Despite initially eroding over half of investors’ wealth in the year following its 2021 listing, Zomato shares have since staged an impressive turnaround.
The food delivery and restaurant aggregator has seen its shares clock a meteoric rise over the past 12 months, surging more than 250 percent in trade.
The stock has outpaced all other global delivery majors, such as Deliveroo or Uber. However, as shares continue to gain on constant stock upgrades, has the rally in Zomato peaked?
Comparison to global peers
On the valuation front, Zomato's shares are richly valued. Kotak Institutional Equities said Zomato commands a valuation as high as 94.3x its one-year forward earnings. For 2026, the brokerage sees a moderation in Zomato’s P/E ratio to 47.2x.
Compared to delivery peers, Zomato’s valuations are exuberant. On April 12, Swiggy, which is Zomato’s closest competitor, was valued at $12.7 billion by Invesco, which holds around 2 percent of the food delivery player. In comparison, Zomato's market cap is around $19.89 billion.
When compared to Chinese delivery major Meituan, which has around 75 million MAU (monthly active users), Zomato records around 35 million MAU as per the last estimates.
Meituan’s total revenue for the quarter ended December 2023 was around $10.20 billion, while Zomato’s revenue from operations for the same quarter came in at Rs 3,288 crore or around $390 million.
So what’s driving the rally in Zomato?
When compared to certain global delivery peers, who are facing concerns with scaling up and seeing pressure on margins, market experts are predicting a continued rise in Zomato. However, instead of its core business - food delivery, a large portion of the bullishness comes from exponential growth seen in the quick-commerce business Blinkit.
Two years since its acquisition by Zomato, Blinkit has emerged as a key driver of earnings growth and revenue. The quick commerce platform has been expanding its dark-store network, diversifying its product range, and venturing into new markets.
A report by JM Financial suggested that the realistic market for quick commerce is significantly larger than food delivery and quick commerce is significantly underpenetrated compared to the delivery segment. Zomato Founder, Deepinder Goyal has also expressed confidence that Blinkit will surpass Zomato soon, despite currently being only half its size.
After 15 years of operations, Zomato finally turned a profit in the first quarter of FY24, coming in at Rs 2 crore. Its net profit continued to rise, reaching Rs 138 crore by the end of December 2023. Thus far, Blinkit has not contributed to profitability. The management has guided that Blinkit might break even in the present quarter, with experts divided on the road to profitability.
There are some difficulties in making a quick commerce business profitable, including high operating costs, low margins, and customer retention. For Blinkit, key challenges include its limited geographic presence, especially in cities in West India and South India. There are some supply-side disruptions, such as product shortages and rider strikes.
Kotak Institutional Equities estimated the basic economics of operating a dark store. If the Gross Merchandise Value (GMV) for a month is around Rs 2.59 crore, the revenue earned by Blinkit would be about Rs 39 lakh. Once expenses such as rent, rider costs, packaging, franchisee commission, and utilities are deducted, which come to around Rs 26 lakh, the remaining EBITDA is 13 lakh per dark store.
Blinkit also faces high competitive intensity, not just from quick commerce platforms, but also local Kirana outlets that offer free home delivery. Its competition includes players such as Swiggy's Instamart, Tata Group's BB Now, Zepto, Amazon, and Flipkart among others.
For instance, Blinkit is the only quick-commerce company that generates a purchase order (PO) daily whereas Swiggy Instamart and Zepto do it every week, as per Sreejith Moolayil, founder of True Elements, a functional foods brand, that sells across the quick grocery platforms.
“Blinkit does daily POs because of which their working capital requirement is the lowest. They don't keep too much inventory. They’re probably losing some opportunities which I don't think they mind, seeing their bottom line and growth,” Moolayil explained.
“Blinkit has done well on two factors: cost control and the ability to get repeat customers. On these two factors, it has outperformed, but a key challenge remains - can they replicate this in newer cities?” asked Amit Khurana, Dolat Capital. He does not foresee a profitable Blinkit shortly.
However, a market expert said, “Whatever the management has guided in the past, they’ve achieved. Therefore, it is likely that Blinkit could break even in Q1FY25.”
JM Financial concurred with this view, saying that after breaking even, Blinkit will likely prioritize growth investments over profitability expansion, to capture the untapped market opportunity and build long-term moats that create tough barriers for the competition to break through.
Blinkit has several advantages working in its favor. These include the money it makes from product sales, ads, and customer fees, as well as the efficiency it gains from managing its stores and warehouses and from its overall business operations.
Per Kotak Institutional Equities, Blinkit’s newer stores are witnessing a faster ramp-up, driven by sharper merchandise assortment and more awareness of quick commerce services by customers.
Blinkit versus Zomato: Valuations
Despite Zomato’s food delivery driving profitability, investors are placing all their chips on bets that Blinkit will lead the next leg of growth and expansion. JM Financial expects that Blinkit could command premium profit multiples to Zomato’s own food delivery business soon.
Per Kotak, the food delivery segment will see a revenue of Rs 7,707.2 crore in FY25, while Blinkit will clock around Rs 4,109.9 crore. For FY26, Zomato's delivery arm might touch around Rs 9,100 crore in revenue, while Blinkit zooms to Rs 7,080 crore.
“We upgrade our FY2025 food delivery GMV (gross merchandise value) growth to 19.7 percent on-year. We also upgrade Blinkit’s GMV growth to 80/70 percent over FY2025/26,” added Kotak.
GMV refers to the total value of all goods or services sold on a platform, while revenue is the actual amount of money a company earns from selling its goods or services.
The average order value for Blinkit improved to Rs 635 per order for the quarter ended December FY24, while the revenue from advertisements jumped 220 percent on-year, with 557 advertisers on the platform.
When estimating its valuation for Zomato, Kotak arrived at a fair value of Rs 210 per share. Of this, the DCF-based valuation of the food delivery business is Rs 102 per share, while Blinkit’s valuation is Rs 84 per share.
JM Financial is valuing the food delivery segment at Rs 128 per share and Blinkit at Rs 104 per share in its 12-month target price of Rs 260 apiece. JM Financial sees Zomato shares touch Rs 400 per share over the next three years. In its three-year outlook, JM Financial projected that Zomato’s market capitalisation could touch Rs 3.57 lakh crore from current levels.
Despite various brokerages upgrading Zomato, with some such as UBS seeing more than a 30 percent upside from current levels, Elara Securities has a target price of Rs 165 on the food delivery aggregator. From the closing level on April 15, this indicates a downside of 12.4 percent.
"The rally in Zomato has reached a certain kind of fair threshold. From here, I don't see a further rally on the cards, especially since the core food business is trading at elevated valuations. Even if BlinkIt valuations are stretched, we could see a fair value target of Rs 190 for FY26," said Karan Taurani, Sr VP, of Elara Securities in a conversation with Moneycontrol.com.
HSBC buys, Mirae sells
For March, buying and selling by mutual funds have been about equal. 68 mutual funds bought Zomato shares, while 66 funds sold a portion of their stake. Around 270 funds continued to maintain their holdings.
HSBC Midcap Fund was the highest buyer, purchasing around 50 lakh shares, while Mirae Asset Large & Midcap Fund offloaded around 45.26 lakh shares.
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