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Zomato must balance growth and margin as sluggish restaurant industry trends loom

Zomato must balance growth and margin as sluggish restaurant industry trends loom

Zomato must balance growth and margin as sluggish restaurant industry trends loom
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By Kanishka Sarkar  Nov 21, 2022 1:23:17 PM IST (Published)

Zomato share price declined on Monday after co-founder Mohit Gupta’s exit last week and the beginning of layoffs to cut costs. Here's what analysts suggest

Zomato shares slipped nearly five percent on Monday after the food delivery platform saw co-founder Mohit Gupta’s exit last week and also the start of layoffs to cut costs. According to Jefferies, times are going to remain challenging for the foodtech as it walks growth versus margin.

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“Going by the release, it does not appear that Zomato is looking for a successor to Mohit Gupta...In our interactions, we find Deepinder Goyal in control of the business,” the brokerage said, adding that that should alleviate leadership concerns.
Gupta, who had joined Zomato four-and-a-half years back, was elevated to co-founder in 2020 from the position of CEO of its food delivery business. His departure is not the first among senior leadership. The company has also seen the recent exits of Rahul Ganjoo, head of New Initiatives, and Siddharth Jhawar, head of Intercity Legends.
At present, founder and CEO Goyal is directly leading the food delivery business, Albinder Dhindsa is heading Blinkit and Rakesh Ranjan is heading Hyperpure.
Even as Jefferies does not see a big disruption or a major change in strategy at Zomato, it has warned that its checks indicate sluggish restaurant industry trends and the management must now balance growth and margin. Therefore, it expects the stock to now be range-bound in the coming months.
The brokerage has given a buy call to the food delivery platform’s stock with a target price of Rs 100, meaning it expects it to rise 49 percent from Friday’s closing price.
Last week, after Zomato’s financial results for the July to September quarter, several brokerages praised it for showing urgency to reduce losses and deliver good growth in Blinkit.
Citi pointed out that Zomato had prioritised profitability over gross order value growth (A&P spends likely declined 100bps+). Given healthy monthly transacting users’ addition of 5 percent on a quarter-on-quarter basis, the brokerage believes the overall 30 percent gross order value growth rate in FY23 should still be achievable.
Meanwhile, Zomato has also begun firing employees in order to cut costs and turn profitable as the macro environment becomes increasingly challenging.
While the firm wants to cut 3 percent of its workforce, nearly 100 employees have already been let go, according to Moneycontrol. The staff impacted by the move include those in the product, tech, catalogue, and marketing teams, though people in the supply chain haven't been affected.
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