Kotak Institutional Equities has upgraded the profit estimates for Zomato, saying that the food delivery company’s recent decision to levy a ‘platform fee’ of Rs 2 per order from its customers will boost the company’s profit margins considerably.
“Assuming customers transact 75 times a year on an average, an Rs2/order platform fee on all orders by such customers can result in Rs 405 mn of incremental contribution profit/EBITDA,” said the broker.
The broker increased its operating profit estimates for the company for the next three years by 21-52%, raised its one-year price target on Zomato stock to Rs 110 from Rs 105 and maintained its BUY rating.
Driving the positive outlook is the introduction of a platform fee and improvements in the food delivery company’s ‘quick commerce’ business.
Platform Fee
Zomato came up with the idea of levying a Rs 2 platform fee per order on its customers this August. The platform fee is added irrespective of the cart value.
The decision comes at a time when delivery apps are reportedly getting a lesser take-rate (the fee charged by a third-party seller on a transaction] as consumers opt for the restaurant’s delivery service.
Not having to share the amount collected under platform fee among the delivery persons or the restaurants, Zomato remains the sole gainer of the platform fee charges.
From a consumer perspective, a charge of Rs 2 levied per order might be small but it would largely impact Zomato’s profit margin.
For example, Zomato reported its highest number of customers at 27 lakhs in 2022.
“Say these customers order food from Zomato 75 times on an average every year then a small amount of Rs 2, for Zomato would translate to Rs 41 crores of incremental contribution of profit,” noted Kotak Institutional Equities.
“It will also imply a contribution margin increase of nearly 1.6% and can be a step toward Zomato’s targeted 8% contribution margin over the medium term, compared with the 6.4% reported in the April-June quarter of FY2024,” it added.
On its part, the company has plastered a message on the app explaining the new charge: "This small fee helps us pay the bills so that we can keep Zomato running."
“The company’s intent seems to be to monetize select customers better, resulting in an increase in the number of customers, which flatlined over the past few quarters," noted Kotak Institutional Equities.
Quick commerce
Another area that Kotak Institutional expects Zomato to make quick strides is in turning around its acquisitions in the quick commerce business — an area of operation that has been a source of relentless losses for the company.
Here, said Kotak, it expects Zomato to turn ‘contribution positive’ in “1-2 quarters”, which would mark a significant step towards shoring up the bottom line not only of the quick commerce operations but also of Zomato as a whole. Contribution positive refers to a situation where each incremental order does not add to the company's losses.
“Focus on efficiencies in both Blinkit and Hyperpure can drive a faster-than-expected increase in profitability for the company,” Kotak observed.
Revenue of Blinkit, which was integrated with Zomato in August 2022, rose 6% sequentially to Rs 384 crore in the April-June quarter in FY2024. The broker pointed out that Zomato has rationalized the dark store count over the past 4-5 quarters and plans to increase the scale of business and control overheads.
Meanwhile, Blinkit’s revenue per store increased 149% year-on-year in the April-June quarter of FY2024.