Entertainment, Travel, Luxury purchases, Eating Out/Ordering-in, etc. These aspirations accompany rising incomes across the length and breadth of the globe. And this universality gives investors of developing economies an opportunity to foresee the consumption patterns of their country and profit from these trends.
In all high-income countries, people indulge heavily in eating out/ordering-in. Indians have already started doing this and it is only going to increase in coming times.
Besides restaurant chains, one obvious beneficiary of this trend in India would be Zomato (Swiggy being unlisted). Zomato has three main verticals – Food ordering, Grocery delivery via Blinkit, and B2B service to restaurants called Hyperpure which are briefly described below:-
- Food Ordering – Zomato has partnered with thousands of restaurants and lists their menu on its platform for ordering. Many restaurants list higher prices for their dishes on Zomato than what they charge to their walk-in/direct ordering customers to cover up for the commission Zomato charges them. This is a tenuous link in the ordering ecosystem (more on this later). After incurring losses for many years, this segment has recently turned profitable and management expects high double digit growth rates with margins in the range of 4-5% in coming quarters.
- Grocery Delivery – Through its 10-minute delivery service ‘Blinkit’, Zomato has made home delivery of groceries very popular. This vertical is still in losses and management expects it turn slightly profitable in a few quarters with high growth rates.
- Hyperpure – In this vertical, Zomato delivers raw materials to restaurants. This segment is also in losses. Management expects high growth rates with lower losses in coming quarters.
Assuming all aspirations of management are met, FY25 P&L could clock PAT in the range of 1000 to 1200 cr. Zomato is commanding market capitalization of 96000 cr (64th largest company by market cap in India) at current price of Rs 110 translating to FY25 PE of 80. While this valuation looks exorbitant, it can be justified if growth continues at high rates. In fact, the management is guiding for 40% YoY growth for next two years in its Q1FY24 PPT.
However, there are a few risks which need to be highlighted:-
- Higher pricing of dishes on Zomato than for walk-in/direct ordering customers can attract regulatory disapproval at some stage. To be fair, customers should be charged same price as the restaurant’s normal menu and Zomato delivery charges should be transparently mentioned separately. If regulators take action on this, Zomato profitability could be hit.
- QSR chains like McDonalds, KFC, Dominos should ideally be equal beneficiaries of the eating out trend but their growth expectations are lower than Zomato’s. This muddles things up a bit.
- Doordash which enjoys 65% market share of food delivery business in the USA has a market cap of 31.5 billion USD ie 2.5 lac crores. Zomato already has a market cap of 96000 cr. Can it catch up with Doordash which is operating in one of the richest nations of the world?
Zomato has run up a lot recently. High returns hereafter will come if it is able to keep growing at high teens with margins sustained for a pretty long time. Will this happen? Only time will tell! In the interim this food company can be subject to wild movements and cause indigestion to investors with weak stomachs.