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Zomato jumps 6% in a weak market; management outlook boosts sentiment

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Despite the Indian headline indices opening lower, Zomato shares jumped as much as 6 percent on Thursday after the food delivery platform company reported its quarterly numbers. Even as the company's loss widened on a YoY basis, encouraging management outlook and business prospects boosted investor sentiment.

Despite the Indian headline indices opening lower, Zomato shares jumped as much as 6 percent on Thursday after the food delivery platform company reported its quarterly numbers.
However, the stock was unable to hold on to its early gains and came off its initial high. At 9:39 am, shares were trading 1.9 percent higher at Rs 138.35 on the BSE.
Even as the company's loss widened on a YoY basis, encouraging management outlook and business prospects boosted investor sentiment.
The company reported a loss of Rs 434.9 crore in Q2 FY22 against a loss of Rs 229.8 crore in Q2 FY21, while revenue increased sharply to Rs 1,024.2 crore from Rs 426 crore YoY.
Zomato said the losses went up due to increased spending on branding and marketing for customer acquisition, increased investments and a growing
share of smaller or emerging geographies in its business. There is also an increase in delivery costs due to unpredictable weather and increase in fuel prices.
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With a bounceback in the restaurant industry, the overall customer traffic on the food delivery platform also increased in Q2, the company said.
“We believe the next 10 years in the Indian internet ecosystem will be unprecedented and will create a tremendous amount of wealth and progress for our country. This has fuelled our ambitions further and we are now thinking about how we can create a $10 billion business by revenue in a few years time,” Zomato said in the release.
“The paradigm for India has changed within a year and that gives us a new opportunity to build a much bigger Zomato than what we dreamt of a year ago,” the company added.
The company said it wants to take an investment route to build businesses instead of building them in-house.
Jefferies noted that the management intends to exit the non-core business with its focus shifting from buy to build. The brokerage has a 'buy' call on the stock.
Macquarie that has an 'outperform' call on Zomato shares pointed out that there is more clarity on the long term strategy and cash usage after Q2 results.
Zomato will invest around $75 million in Bigfoot Retail Solutions for about an 8 percent stake as part of a larger round of around $185 million.
Bigfoot Retail Solutions is a B2B logistics-tech company that enables online commerce by providing seamless shipping and fulfilment services to direct-to-consumer brands and omnichannel sellers.
Further, Zomato will invest about $50 million in Samast Technologies for about 16 percent stake as part of a total round size of $60m.
“We plan to deploy another $1 billion over the next 1-2 years, with a large chunk of it likely to go into the quick-commerce space,” Zomato said.
Goldman Sachs believes Zomato is well-positioned to capture the accelerated shift to online in the food delivery space. The brokerage said that the market is likely to reward growth over profitability for foreseeable future.
"What caught our attention in the MD&A are (1) ambition of creating a US$10bn revenue business (vs US$266mn revenue in FY21) in a ‘few years’ time and (2) Alibaba / Tencent / Info Edge like aspiration of taking the investment route to building the hyperlocal e-commerce ecosystem," said ICICI Securities in a note.
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