Zomato’s bigger delta for rerating or up move in target price will come from Blinkit: Karan Taurani

Karan Taurani, Senior Vice-President-Research Analyst, Elara Securities, says “the valuations of the food business are at quite a premium. So the bigger delta in terms of rerating or an up move in terms of target price will come from Blinkit because that is a business which is growing at a very fast pace.”

So potentially the break-even, if it happens in the next two quarters, will provide us more visibility in terms of where this business could be headed in the next two to three years.


What is your first take on Zomato? Clearly above expectations.
Karan Taurani: Yes, I think a strong set of numbers. On the food delivery side, it was very much expected that they will do a growth of more than about 25% odd. We have seen the positive impact of the festive and of the cricket World Cup in this quarter. And if you look at the performance of the last QSR chain, Zomato has been the biggest beneficiary of the World Cup because the environment in terms of demand for the food sector has been quite volatile.


Most QSR companies have reported an SSG decline on a heavy base of last year. So clearly Zomato has been the biggest beneficiary versus the QSR chain. And this is not only growth, it also comes at an improvement in terms of profitability as well. EBITDA as a percentage of GOV has grown towards about 3%. And in a few quarters, they will come to the guidance of 4-5% EBITDA as a percentage of GOV as far as the food business is concerned.

So the numbers merit a re-rating in the stock as well? Would you up your price target?
Karan Taurani: We have a price target of Rs 150. Potentially, in terms of numbers, we had already factored in the growth as far as the food business is concerned because going ahead, we do not see this kind of growth on a sustainable basis.

20% GOV growth is what could be sustainable, which is largely priced into our estimates.

The delta will be in terms of the profitability, because the pace of growth in terms of contribution margin and both EBITDA for the food business has come quite sharply. There are two, three levers for that as well. One very big lever is the platform fee, which they have increased over a period of time. And in January, again, they have increased the platform fee to Rs. 4 in a phased manner. That is driving better profitability.

Second is also the advertising revenue broadly, which is also a potential lever apart from the increase in commission rates. I am saying that a mix of both revenue and profitability for the food business, but the valuations of the food business are at quite a premium. So the bigger delta in terms of rerating or an up move in terms of target price will come from Blinkit because that is a business which is growing at a very fast pace.

So potentially the break-even, if it happens in the next two quarters, will provide us more visibility in terms of where this business could be headed in the next two to three years. I think net-net, the re-rating will be driven more by Blinkit than by the food business because the numbers are largely priced in.

Lastly, they have also upped their guidance. They had mentioned about some 40% consolidated revenue growth for about eight quarters. Now that stands to be at about 50% odd. Definitely there is confidence to grow at a faster pace as compared to what it was about six months ago.