Food delivery giant Zomato is expected to maintain its competitive advantage in the quick commerce industry in the face of rising competition, Kotak Institutional Equities believes.
What Happened: Kotak believes that Zomato remains better positioned with its quick commerce vertical Blinkit amid heightening competition.
In August, the quick commerce industry saw the entry of e-commerce bigwig Flipkart with its Minutes service whereas Amazon is also reportedly planning its debut in the sector soon. Tata Group‘s Bigbasket is also pivoting to a full-quick commerce model.
Zepto, on the other hand, has raised $340 million (₹2,851 crore) in its latest funding round led by General Catalyst. With this, Zepto's valuation has surged by nearly to $5 billion (₹41,934 crore) from $3.6 billion(₹30,192 crore) in June.
Despite a crowded market, Kotak expects Zomato’s Blinkit is well-positioned to maintain its leadership position. Blinkit's average order value (AOV), which has ranged between ₹610 and ₹625 over the past four quarters, is 15%-20% higher than that of its peers, who generally rely more heavily on food and grocery items, Kotak said.
Among new entrants, BigBasket may have an AOV advantage due to its slotted delivery service and established customer base, the brokerage noted. Additionally, Flipkart could have an edge by offering rapid delivery of select items, such as laptops, within 10-20 minutes in specific locations, the brokerage added.
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Price Competition And Expansion: Kotak sees price competition between the players to likely increase as they expand to new areas and in areas where competitor is larger.
According to Kotak’s comparison of the pricing for a basket of everyday consumption items, which accounts for 75-80% of sales for QC companies, shows that new players are focusing on price competition. Additionally, there is considerable price variation across different platforms, especially in categories like fruits and vegetables, where no fixed maximum retail price is set.
“Our discussions with some of these players reveals that they are all looking to expand their dark store networks significantly over the next 8-12 months in a bid to attract new users and penetrate both existing and new cities better,” the brokerage said in its note.
Zomato is likely continue to aggressively expand its store network to reach customers more quickly, although it may need to accept lower margins in the process.
Regulatory Headwinds: Amid a positive future, the rapidly widening industry size may also attract more regulatory scrutiny, Kotak said.
The risk of regulatory scrutiny is mainly centred on two areas: first, the compensation and benefits provided to delivery riders, which is a concern also relevant to the food delivery industry; and second, any potential government actions aimed at safeguarding the interests of small retailers or kirana stores.
In the short term, the presence of additional competitors and increased government scrutiny might keep Blinkit’s valuations stable. A lower growth rate of the gross merchandise value and a slower path to profitability could lead to a reduced discounted cash flow-based valuation and, consequently, a lower implied enterprise value-to-sales multiple, which measures a company’s value based on its sales.
Price Action: Zomato was trading flat at ₹253.55 on Friday afternoon.
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