JM Financial cuts Zomato growth forecast from 25% to 21% over FY23-27

The food delivery firm's strategy to invest in customers who have high order frequencies will help achieve profitability in the long run but will impact short-term growth, said JM Financial.

JM Financial cuts Zomato growth forecast from 25% to 21% over FY23-27

Monday April 10, 2023,

3 min Read

Food delivery firm Zomato is likely to grow at a compound annual growth rate (CAGR) of 21% over FY23-27, brokerage firm JM Financial has said in a research note, revising its earlier forecast of 25%.

The firm led by Deepinder Goyal is now investing in customers whose order frequencies are high rather than focusing on expanding the long tail on customers ordering infrequently. While this strategy may improve profitability in the long run, short-term growth in monthly transacting users will be impacted, the note dated April 6 said, leading to the revision of its earlier growth forecast.

Zomato reintroduced the Gold loyalty programme in January to offset the degrowth in the food delivery numbers. The re-pricing of the membership fee and the closure of operations in 225 loss-making cities are likely to help achieve profitability in the next few quarters, the note said.

Zomato and rival Swiggy are doubling down on quick commerce as growth frontiers as it offers a much bigger total addressable market than food delivery, especially with competitive intensity slowing down. Both companies are making a greater number of incremental investments in quick commerce than in food delivery as the strategy going forward.

The brokerage firm said Zomato continues to report strong sequential growth in gross order value, driven by volume, as average order volume is likely to shrink due to the company's focus on enhancing customer experience and expanding the transacting base.

Last month, YourStory had reported that Zomato has started asking restaurants to pay a higher commission and spend more on marketing on the platform to improve economics and take rates (commission) with restaurant partners. The move is expected to boost the firm's margins and bring it in line with Swiggy's take-rates, which, on average, are relatively higher than that of Zomato by ~200bps—a gap that Zomato is now attempting to narrow.

"We also expect both contribution margin and EBITDA margin to increase due to improvement in take-rates (because of better product commissions and ad income), slowing competitive intensity, and delivery partner-related cost efficiencies," JM Financial said in the note.

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However, EBITDA is unlikely to break even in the near term as the company plans to grow dark-store count by ~30-40% over the next 12 months to partially offset improvements in existing store profitability.

JM Financial added that it continues to remain bullish on the company’s long-term prospects in the hyperlocal delivery space as it is well positioned to benefit from robust industry tailwinds such as improving tech penetration and rising income share of digitally native millennials or GenZ.

Last month, an HSBC report suggested that Zomato has started reclaiming some of its market share from Swiggy in the food delivery play, helped by an uptick in Gold membership signups. This signals that Zomato is moving aggressively towards improving its unit economics and profitability prospects as it deals with crashing stock price, the aftermath of senior-level exits, backlash from restaurant partners, and intense competition from Prosus-backed Swiggy.

Edited by Affirunisa Kankudti