Store Network Expansion Will Strengthen Presence In Smaller Cities

Key Takeaways

• Rapid store expansion and focus on operational efficiency in mature stores could enhance revenue growth and improve contribution and net margins.
  
• Strategic investments in service quality and marketing aim to sustain high market share and increase customer acquisition and retention, boosting long-term revenue.
  
• Expansion and marketing costs, coupled with competitive pressure and economic slowdown, are impacting Zomato's profitability and revenue growth prospects.

Catalysts

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

• Zomato is expanding its store network rapidly, adding new stores and increasing its presence in smaller cities. As these new stores mature and reach higher utilization, this could lead to revenue growth and improved contribution margins.
  
• The company is focusing on increasing operational efficiency in its mature stores, which are already achieving healthy contribution margins. As these efficiencies scale across the network, they could enhance net margins.
  
• Despite growing competition, Zomato is maintaining its market share through investments in maintaining high service quality. This strategic focus can support sustained revenue growth in the face of competitive pressures.
  
• Zomato is investing in marketing to drive customer acquisition and retention, especially in new areas. This is expected to enhance revenue over the long term as customer lifetime value increases with high retention rates.
  
• The company is involved in various initiatives, such as quick deliveries in food and its Blinkit venture, which can increase the user base and average order values over time, potentially improving overall earnings.

Zomato Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Zomato's revenue will grow by 39.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 10.4% in 3 years time.
• Analysts expect earnings to reach ₹50.6 billion (and earnings per share of ₹5.32) by about January 2028, up from ₹6.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 82.3x on those 2028 earnings, down from 304.1x today. This future PE is greater than the current PE for the IN Hospitality industry at 35.5x.
• Analysts expect the number of shares outstanding to grow by 1.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.52%, as per the Simply Wall St company report.

Zomato Future Earnings Per Share Growth

Risks

• The expansion of new stores and warehouses, along with the related upfront costs in Quick Commerce, has led to worsening profitability, which may impact net margins.
  
• The increased marketing costs, especially digital marketing expenses, to compete with ongoing competitive activity could pressure overall earnings.
  
• The decline in customer delivery charges to remain competitive may reduce the take rate, affecting revenue growth.
  
• The impact of broader economic slowdown on food delivery services could result in moderated revenue growth, especially if urban consumption experiences prolonged weakness.
  
• The ongoing competition in both Quick Commerce and food delivery may lead to increased costs for customer acquisition and retention, putting pressure on profit margins and overall earnings.

Valuation

• The analysts have a consensus price target of ₹291.54 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 ₹400.0, 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 2028, revenues will be ₹485.3 billion, earnings will come to ₹50.6 billion, and it would be trading on a PE ratio of 82.3x, assuming you use a discount rate of 14.5%.
• Given the current share price of ₹222.5, the analyst's price target of ₹291.54 is 23.7% higher.
• 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.