Zomato's second-quarter results surpass expectations, but aggressive expansion costs loom

Zomato's second-quarter financial results surpassed market expectations, driven by robust revenue growth across segments and improved profitability. However, analysts warn that the company's aggressive expansion plans and quick commerce investments could pressure margins in coming quarters.

According to Bloomberg, Zomato reported its second quarter 2023 results, revealing a revenue of INR48 billion (approx. US$570.72 million), which represents a 68% increase compared to the same period last year and surpasses the estimate of INR46.92 billion. The company's net income for the quarter reached INR1.76 billion, a significant rise from INR360 million in the same period last year, although it fell short of the Bloomberg Consensus estimate of INR2.49 billion.

Operating expenses totaled INR47.8 billion, reflecting a 57% increase compared to the same period last year. Adjusted revenue for the quarter was INR51.27 billion, up 58% compared to the same period last year, while adjusted EBITDA climbed to INR3.3 billion, compared to INR410 million a year earlier.

In segment performance, food delivery gross order value reached INR96.9 billion, marking a 21% increase compared to the same period last year. Food delivery revenue rose to INR20.1 billion, up 30% compared to the same period last year, while Hyperpure revenue surged by 98% compared to the same period last year to INR14.73 billion. Quick Commerce revenue also saw substantial growth, reaching INR11.56 billion compared to INR5.05 billion in the previous year.

Bloomberg Intelligence analyst Nethan Naidu noted in a research report that Zomato may continue to experience pressure on its bottom line and margins in the upcoming quarters due to aggressive growth strategies and potentially increasing losses in the quick commerce segment. The company plans to expand its dark store network from 639 locations in the fourth quarter of 2023 to 1,000 by March 2025 and 2,000 by March 2026. These expansion plans, along with an INR85 billion new share issuance through a qualified institutional placement, appear essential as competitors like Swiggy and Zepto secure funding for expansion through IPOs.

Despite these challenges, Naidu added that the ongoing cash burn is not expected to hinder Zomato's path to net profitability, as the company is likely to maintain its dominance in the Indian online food delivery market, which contributed nearly 100% of group adjusted EBITDA in the 12 months ending in June.

Source: Zomato, October 2024