Zomato’s sour Q3 is one problem, the other is the post-result silence

In their December quarter (Q3FY22) earnings review report, analysts at Jefferies India wrote, “The lack of management calls leaves much to the imagination and our inexperience with the internet sector doesn’t help either.” Recall that at the time of the announcement of Q1 results, Zomato had said that it would take an earnings/analyst call once a year at the end of each financial year.

“The (Q3) earnings release remains opaque, lacks abstraction, and describes only select aspects of the business,” said analysts at Jefferies.

With growth slowing down, Zomato’s Q3 results weren’t encouraging. Gross Order Value (GOV) up just 1.7% sequentially 5,500 crore in Q3. Note that on a quarter-on-quarter basis, GOV had grown by 19% and 37% in Q2 and Q1 respectively, 5,410 crore and 4,540 crores.

Zomato attributed the weak sequential GOV growth in Q3 to fall in delivery charges and post-Covid reopening, leading to a shift towards eating out. Customer delivery fee per order fell 7.5 sequentially. The company redistributed its growth investment in favor of a discount on customer delivery charges compared to food coupons. Zomato said that it was seeing a higher return on investment with discounted delivery charges as compared to coupons. Hence, there was a decline in discount per order Q2 as compared to 5.

Average monthly transaction users fell for the first time in five quarters to 15.3 million in the third quarter. However, it should be noted that Q2 had a high base of 15.5 million with 26% sequential growth.

Overall, Zomato’s adjusted revenue was flat in Q3 1,420 crores. EBITDA (earnings before interest, taxes, depreciation and amortization) was a loss 489 crore, from the bottom 535.8 crores were seen in Q2. Contribution margin (as a percentage of GOV) for its food delivery business was flat at 1.2% in Q2 compared to 1.1% in Q3.

On the positive side, the Hyperpure business, which is Zomato’s supply platform for restaurants, performed well with a sequential revenue growth of 40 per cent. 160 crores.

Still, investors seem to be unhappy with Zomato’s Q3 performance. The stock fell nearly 6% on the National Stock Exchange in early deals Friday. Shares are down more than 45% from the highs seen on November 16, although they are about 17% higher than the initial public offering (IPO) issue price. 76 per share.

Jefferies retains its Buy rating on the stock with a revised price target of Rs. 120 each, as it cut target multiples for the delivery business, reflecting de-rating and weak Q3 trends in global counterparts. “We believe that management should address tough investor questions via earnings call rather than provide abstract details on the business,” analysts said in a report on February 10.

In general, the analyst and investor community view post earnings calls as a good practice. Note that recently listed new-age companies such as One97 Communications Limited (Parent of Paytm), FSN E-Commerce Ventures Limited (Parent Company of Nayaka) and PB Fintech Limited have called all investors after announcing the quarterly results. .

Meanwhile, Zomato plans to channelize its cash balance to invest in instant commerce platforms apart from growing its core business. It raised the upper limit for potential investments in Accelerated Commerce to $400 million over the next two years. However, it remains to be seen how profitable such investments prove to be, as the company is already making losses.

In general, increased competition remains a major threat to the sector. Considering the global correction and weak results of tech stocks, several analysts have cut their target price for Zomato.

In a report on 11 February, analysts at JM Financial Institutional Securities Ltd said, “Given rising global interest rates, we use a higher WACC of 12% (versus 11%) to discount this valuation back to March’23.” Revised target price of Rs.155 (versus Rs.180 earlier).” WACC stands for Weighted Average Cost of Capital.