Expanding Beyond NCR Into Quick Commerce And New Markets Will Increase Customer Reach And Operational Efficiency

Key Takeaways

• Zomato's expansion into quick commerce and new categories enhances revenue potential and broadens customer appeal.
  
• Increasing operational capacity and targeting underserved metropolitan markets are set to boost market penetration and improve margins.
  
• Intense competition, high capital expenditure, and expansion risks may pressure Zomato's market share, profitability, and earnings amidst efforts to bolster financial position.

Catalysts

Primarily operates as an online food delivery company in India and internationally.

• Zomato is expanding into quick commerce with a significant year-on-year growth of 120%-130%, which can increase revenue through diversified offerings and faster delivery times appealing to a broader customer base.
  
• The company's focus on expanding into new categories and increasing assortment in quick commerce is expected to drive higher average order values (AOVs), impacting revenue positively.
  
• Zomato is working on increasing its footprint beyond the NCR region, targeting metropolitan markets where it is not yet the leader, which can lead to higher market penetration and increased revenue from underserved regions.
  
• The addition of new stores and warehouses is set to increase operational capacity, which could drive up service capacity and, in turn, contribute positively to revenue and margins as the initial fixed costs stabilize over time.
  
• By maintaining the infrastructure and expanding in the top 8 cities, Zomato is poised to address supply gaps and streamline operations, ultimately leading to improved net margins as economies of scale and operational efficiencies are realized.

Zomato Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zomato's revenue will grow by 37.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.7% today to 13.5% in 3 years time.
• Analysts expect earnings to reach ₹55.0 billion (and earnings per share of ₹5.62) by about December 2027, up from ₹7.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹67.3 billion in earnings, and the most bearish expecting ₹21.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 80.6x on those 2027 earnings, down from 343.2x today. This future PE is greater than the current PE for the IN Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 3.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.39%, as per the Simply Wall St company report.

Zomato Future Earnings Per Share Growth

Risks

• The increasing competition in the quick commerce sector, with new players like Flipkart entering the market and delivering shorter timelines, can put pressure on Zomato's market share and impact future revenues and earnings.
  
• The growth in average order values (AOVs) and expansion in new categories may not lead to higher profitability since urgent use cases dominate, and returns from categories like electronics and beauty haven't reached significant scale, potentially impacting net margins and earnings.
  
• The capital expenditure required to expand stores and infrastructure, including 152 new stores and 7 new warehouses, could strain cash flows and affect profitability if the returns do not match investments, impacting net margins.
  
• The resolution to potentially raise $1 billion in capital suggests a need to bolster the financial position amid competitive pressures, which could dilute existing shareholding and affect earnings per share.
  
• The continued focus on expanding into new cities and testing the viability of the quick commerce model may involve risks if these new markets do not demonstrate rapid ramp-up and profitability, potentially affecting future revenue and net margins.

Valuation

• The analysts have a consensus price target of ₹302.58 for Zomato based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹375.0, and the most bearish reporting a price target of just ₹130.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹407.4 billion, earnings will come to ₹55.0 billion, and it would be trading on a PE ratio of 80.6x, assuming you use a discount rate of 14.4%.
• Given the current share price of ₹291.9, the analyst's price target of ₹302.58 is 3.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.