Food delivery platform Zomato‘s shares were climbing on Tuesday after analysts at a domestic brokerage hiked profit estimates for the firm on the back of a key change to its business strategy.
What Happened: Analysts at brokerage firm Kotak Institutional Equities has estimated that Zomato could see a significant boost in profit or EBITDA, amounting to ₹40.50 crore, due to the introduction of a platform fee of ₹2 per order.
Zomato introduced its platform fee in August, following a similar move by rival Swiggy in April for specific users. Zomato aims to apply this fee universally, regardless of the Gold status, to enhance its customer take-rate. According to the foodtech firm, the fee is intended to support the platform’s operational costs, ensuring the service continues to run smoothly.
Why It Matters: This move is expected to result in an increase in the contribution margin by around 16 basis points. Achieving this could be a strategic step towards Zomato’s medium-term goal of reaching an 8% contribution margin as a percentage of gross merchandise value, compared with the reported 6.4% margin in the first quarter of FY24.
Kotak predicts that expanding the business and cost management efforts will drive these segments towards profitability in the coming quarters. For grocery delivery arm Blinkit, Zomato has been reducing the number of dark stores over the past four to five quarters, which the brokerage said likely grew revenue per store in the first quarter. The company aims to achieve a positive contribution margin within the next couple of quarters.
Get all the latest Share Market trends and news to set you up for the week ahead.
The report by Kotak also suggests that a focus on efficiencies in both Blinkit and Hyperpure could lead to a faster-than-expected increase in profitability for Zomato. As a result, the brokerage has upgraded its FY2024-26 EBITDA estimates by 21%-52% and FY2025-26 earnings per share estimates by 97%-177%.
Kotak notes that in recent quarters, the bulk of the take-rate improvement has been driven by a restaurant take-rate increase, while delivery take-rate has lagged. Despite this, the brokerage house has maintained its “buy” rating and upped its target price to ₹110 from ₹105 per share.
Price Action: Zomato’s share price was up 0.61% at ₹98.65 in afternoon trade on Tuesday.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.