Kotak raises Zomato fair value on higher contribution margin for food delivery

Kotak Institutional Equities has raised the per-share fair value of food and grocery delivery platform Zomato to Rs 125 from Rs 100 earlier.

The increase in fair value, on the basis of information provided in the company’s FY23 annual report, is mainly due to the contribution margin for food delivery which rose “handsomely” to Rs 18.5 per order in FY23 from Rs 6.6 in FY22, driven by higher revenues and cost optimisation, the brokerage firm said.

Contribution margin represents the revenue that a company gains by selling each additional unit of a product.

Kotak has valued the food delivery business of Zomato at Rs 83,100 crore on a discounted cash flow (DCF)-based valuation methodology. In addition to food delivery, Zomato also operates quick commerce platform Blinkit and business-to-business grocery sourcing service Hyperpure.

Zomato’s contribution margin increase was driven primarily by a jump of Rs 6.3 in revenue per order — of which Rs 2.7 is attributable to higher take rate and Rs 3.6 to increased advertising revenue, Kotak said. There was also a reduction in variable costs to the tune of Rs 5.2 per order, driven by lower discounts and other costs, and a minor drop in delivery costs of Rs 0.4 per order.

In FY23, Zomato’s food delivery business saw the average order value increasing 2% year on year to Rs 407.

Also read | Zomato shares hit 52-week high of Rs 105.90; m-cap nears $ 11 billion

Zomato’s operating revenue for FY23 was at Rs 7,080 crore, compared with Rs 4,190 crore in FY22. The Gurugram-based company’s operating revenue from food delivery grew 33% year on year to Rs 4,530 crore in FY23.

In the June-quarter of FY24, Zomato reported its first ever quarterly net profit of Rs 2 crore, pushing up its stock price to new 52-week highs. On October 18, the stock rose to Rs 115 apiece, nearing a market capitalisation of $12 billion.

On Wednesday, the stock ended at Rs 108.15 on the BSE, down 0.69% from its previous close.

For the quarter ended September 30, brokerage firm UBS estimated that India’s food delivery market has grown 10% sequentially. ET reported on October 10 that UBS has estimated month-on-month volume growth of 2% and 4% in July and August respectively for Zomato. This is behind Swiggy’s volume growth of 7% and 6% for the respective months, it had said.

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