scorecardresearchZomato's gross order value for Q3 likely to be subpar; profitability unlikely

Zomato's gross order value for Q3 likely to be subpar; profitability unlikely to improve in 1HFY24: HSBC Global Research

Updated: 19 Jan 2023, 02:26 PM IST
TL;DR.

  • According to the brokerage, slow industry growth and strong competition from its peer Swiggy may have an influence on Zomato's growth in Q3FY23.

According to the HSBC Global Research, slow industry growth and strong competition from its peer Swiggy may have an influence on growth in Q3FY23.

According to the HSBC Global Research, slow industry growth and strong competition from its peer Swiggy may have an influence on growth in Q3FY23.

Despite the favourable seasonality in the third quarter, food delivery company Zomato's gross order value (GOV) growth is likely to be subpar, said HSBC Securities and Capital Markets (India) (HSBC Global Research). 

Given the growth trends in quick service restaurants (QSR) in Q3 and potential shifts in consumer spending towards dining out, the food delivery industry's growth is projected to be sluggish in the third quarter, it said.

According to the brokerage, slow industry growth and strong competition from its peer Swiggy may have an influence on Zomato's growth in Q3FY23. However, food distributors' profitability should continue to go up.

"We are seeing discounts holding broadly stable for Zomato, but increasing for Swiggy, particularly in tier 2 towns. In addition, Swiggy continues to discount delivery charges through its 'SwiggyOne' proportion and that is likely to put pressure on market share for Zomato in Q3FY23," said the brokerage in its report.

As per the report, Zomato will be relaunching its loyalty app ‘Zomato Gold’, which will restrict further contribution margin improvement in the near term.

Beyond the third quarter, tough industry competition and decreasing industry growth are likely to continue preventing Zomato from increasing its profitability in 1HFY24.

Therefore, for the company to do well in 2023, the industry's reacceleration and its response to Swiggy's aggressive go-to-market strategy will be key, according to the brokerage.

Further, the brokerage is bullish about Blinkit business of the food aggregator. It believes that the instant delivery grocery and e-commerce platform will be an important business for Zomato and that consistent growth in GOV and profitability in 2023 will support the stock price.

"We believe expectations are a lot more realistic now and are factoring in c15% food delivery GOV growth in the long term, which, in our view, is achievable. On top of that, we are not overly negative on the Blinkit business and expect positive surprises on GOV growth and profitability over the coming quarters. We trim our estimates for Q3 and now assume flat GOV growth for food delivery, with a modest sequential recovery in Q4," said the brokerage.

The brokerage has reduced the target price of the stock to 87 from 90, and maintained 'buy' rating.

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First Published: 19 Jan 2023, 02:26 PM IST