Zomato’s losing steam and the Blinkit drag

Zomato’s losing steam and the Blinkit drag

While food-delivery remains Zomato's mainstay, its growth engine lies in Blinkit, its quick-commerce business. (NurPhoto)

Summary

• Zomato's remarkable growth trajectory is now at a crossroads as it battles profitability issues and fierce competition. With Blinkit becoming a significant part of its revenue, the pressure to invest heavily raises questions about sustainable growth.

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Zomato has been a poster child of startup success. After its IPO in 2021, the stock had been a dull counter until June 2023—the first quarter when its bottom line turned positive. There has been no looking back since.

On the back of 44% annualized revenue growth and sustained profitability growth, the stock quadrupled investor wealth in the year and a half until December. But the rally seems to be losing steam now—the counter has corrected by almost 17% off its peak.

While some consolidation after a steep rally is par for the course, the latest bout of correction has been particularly steep—the Zomato stock has eroded about 12% of investor wealth in less than a week. Panic around the stock increased after brokerage Jeffrey’s recently downgraded its recommendation on Zomato to a ‘hold’ rating from a ‘buy’, and cut its share price target significantly from ₹335 apiece to ₹275—which is only a 10% upside over the current market price of about ₹250.

On Wednesday (8 January) afternoon, Zomato shares were down by about 2.8% at ₹245.35 apiece on BSE, while the benchmark Sensex index was down 0.56%.

Also read | Zomato upends tradition with Sensex entry

New deep-pocketed rivals

Zomato had started as an online restaurant aggregator platform in 2015. Since then, it has diversified into quick-commerce, via its acquisition of Blinkit, and entertainment-ticketing (District) via its recent acquisition of this business from Paytm. It has also backward-integrated into providing food supplies to restaurants through HyperPure. Among all its acquisitions, Blinkit emerged as the hero by contributing almost a quarter of Zomato’s revenue in FY24, and even higher in FY25 so far.

View Full Image (Zomato's Q2 FY25 investor presentation)

But in terms of profitability, Blinkit has only recently started approaching breakeven. For perspective, Zomato’s food-delivery business turned profitable as early as the second quarter of FY23, but owing to the drag by Blinkit, Zomato as a whole turned profitable only in FY24. Furthermore, although Blinkit turned contribution-positive in Q2 FY24, during the quarter it generated an Ebitda loss of ₹125 crore while the food delivery business registered an Ebitda profit of ₹204 crore.

View Full Image (Zomato's Q2 FY25 investor presentation)

Of course, Blinkit’s financials have improved in recent quarters, leading to near breakeven in FY25. But despite a 122% year-on-year growth in gross order value (GOV) and an 89% year-on-year growth in average monthly transacting customers at Blinkit in Q2 FY25, its profitability has been strained due to the scaling up of its infrastructure. New added stores and backend warehouses take a few months to ramp up, and remain margin-dilutive meanwhile.

View Full Image (Zomato's Q2 FY25 investor presentation)

To make matters worse, competition has been steadily intensifying in the quick-commerce segment. While Blinkit is already competing with incumbents Zepto and Swiggy’s Instamart, the impending entry of new deep-pocket players in the market such as Amazon’s Tez and Flipkart Minutes has added to the competitive pressure.

To keep pace with this rapidly escalating competition, Blinkit will need to put profitability on the backburner for a couple of years. It will need to double down on store and warehouse expansion to gain market share and, hopefully, mind-share as well. So it will take Blinkit a few years longer than initially anticipated to achieve profitability.

This prompted Jeffrey’s to downgrade Blinkit’s target multiple by half to 6x. This moderation in Blinkit’s earnings expectation was at the heart of its recent downgrade of the Zomato stock. Jeffrey’s also cut its earnings per share projections for Zomato in FY26 and FY27 by about 20% each.

Also read | Zomato is built on a cult of personality. Here’s why it works—until it doesn’t

Food delivery: From strength to strength

Even as Blinkit grows as a share of Zomato’s business, food-delivery has remained the company’s cornerstone. As one of the first movers in India’s food-delivery business, Zomato has built a strong network of around 250,000 restaurant partners and 400,000 delivery partners, which has enabled it to build a lasting brand impression.

Behind the scenes, Zomato’s models for real-time demand-forecasting, delivery partner fleet optimization, and order dispatch have been trained to near-perfection. This has enabled Zomato to deliver consistent service at competitive rates, reflected in the steady growth in its gross order volume, which increased from ₹7,980 crore in Q2 FY24 to ₹9,690 crore in Q2 FY25.

Not only has Zomato been adding new customers, as seen in the steady increase in its annual transacting customers (ATC) metric, but its customers have also been transacting more frequently, as evidenced from the consistent increase in its annual order frequency and in the number of power customers—who order more than 50 times in a year.

View Full Image (Zomato's Q2 FY25 investor presentation)

The road ahead looks promising for food-delivery as a whole, given the limited restaurant food penetration in India. To cater to this growing market, Zomato has been investing in its restaurant partners and delivery partners. This widespread network has lent Zomato’s food-delivery business the scale and efficiency to deliver sustained growth in profitability over the quarters.

View Full Image (Zomato's Q2 FY25 investor presentation)

Higher highs and higher lows

Aligned with Zomato’s robust fundamentals, the technical analysis of its stock price has been displaying unambiguous characteristics of a long-term uptrend since the middle of 2023. The stock has been forming higher highs and higher lows, with the previous highs acting as strong supports during temporary downswings within the uptrend.

The latest such support was at around ₹240, which has been respected twice—in September and November. The current bout of correction has already taken the stock down to ₹250 per share. If the stock breaks below the previous support of ₹240 and sustains below it, it would mark an end to the clear uptrend witnessed so far.

View Full Image (TradingView)

At the same time, spikes in volumes tend to signify conviction in the trend. The recent correction has been accompanied by multiple volume spikes, which are much larger than the volumes seen during the previous two times when the ₹240 level was tested. This makes the latest downswing much riskier, and it seems to have the potential to break the uptrend. If Zomato’s stock price breaks below ₹240 and sustains below it the next support can be expected at the ₹200 level.

The Blinkit drag

Zomato has built a strong and sustainable business model in food delivery but its investments in quick commerce have been dragging down profitability. Of course, the investments were justified, considering that demand for quick-commerce deliveries is skyrocketing. Zomato’s investments in new stores and warehouses for Blinkit were paying off as well—Blinkit has been showing phenomenal improvement in revenues and was even nearing breakeven.

But the competitive landscape is intensifying with the entry of new and deep-pocketed players in India’s quick-commerce market. If Zomato intends to retain the market share and mind share it has gained in quick-commerce over the last few quarters, it will need to ramp up its investments in Blinkit. This will send Blinkit back into loss-making territory.

In other words, the higher Zomato’s ambitions with quick-commerce are, the more it will invest in scaling up Blinkit’s infrastructure, which, in turn, will deepen Blinkit’s drag on Zomato’s profitability.

That said, it can be argued that India’s quick-commerce pie is big enough for all players. And so, despite the medium-term drag on profitability from Blinkit, the long-term prospects remain strong. This is probably why 23 out of 26 brokerages are still quoting a ‘Buy’ rating on Zomato’s stock.