Zomato shares gain 6% post Q2 earnings, here's what brokerages say

Shares of Zomato Limited surged 6 per cent to hit an intraday high of Rs 144 on the Bombay Stock Exchange (BSE) after the company reported its earnings for the quarter ended September 2021.
 
The stock opened 1.65 per cent higher at Rs 138 against the previous close of Rs 135.75 on BSE. With a market capitalisation of Rs 1,00,000 crore, the shares traded higher than 5 day, 20 day, 50 day, 100 day and 200 day moving averages.
 
The online food delivery giant reported a net loss of Rs 429.6 crore in the July-September quarter against a loss of Rs 229.6 crore in the year-ago quarter. The company had posted a loss of Rs 356.2 crore in the preceding June quarter.
 
The company attributed the increase in its loss to investments in the growth of food delivery business. "Three reasons to be specific - a) increased spending on branding and marketing for customer acquisition, b) increased investments and growing share of smaller/emerging geographies in our business (which are less profitable today compared to more mature cities) and c) increased delivery costs due to unpredictable weather and increase in fuel prices," Zomato said.
 
The delivery cost per order increased by Rs 5 per during the September quarter as compared to the preceding June quarter due to the prolonged and unpredictable rainy season and a sharp increase in fuel prices.
 
"We don't expect the delivery costs to go up further and overall feel confident about our contribution margin staying positive in the mid, as well as long term," the company said.
 
Zomato said its adjusted revenue in the September quarter stood at Rs 1,420 crore, registering a 22.6 per cent growth quarter-over-quarter (QoQ) and 144.9 per cent growth year-over-year (YoY).
 
ICICI Securities noted that Zomato's Q2FY22 revenue growth was incredibly strong (+21% QoQ & 140% YoY) and way higher than our expectations (+10% QoQ). The delivery fee (+25% QoQ) outgrew GOV (+19% QoQ) by a margin, hinting at a meaningful increase in delivery charges.
 
"Operationally, both supply (restaurants: +15% QoQ) and demand-side (MAUs: +31% QoQ; MTUs:+26% QoQ) metrics reported an impressive increase. This strength seems to be driven by opportunistic branding and marketing investments (+Rs0.4bn vs Q1FY22) focused on driving the return of customer traffic post the 2nd covid wave," the domestic brokerage house noted.
 
"Besides this, (1) increase in delivery cost (Rs 5 / order or Rs 73 crore, vs Q1FY22), (2) growing share of cities outside top-20 and (3) higher ESOP expenses (+Rs 20 crore billion,vs Q1FY22 and +Rs 70 crore billion vs our FY22 run-rate estimate) led to Rs 160 crore higher EBITDA loss vs the previous quarter," it added.
 
Jefferies noted that the Q2 MTU & GOV are a big positive, of course, comes at the cost of profitability. The management intends to exit non-core, with focus shifting from buy to build. The brokerage house has maintained a 'Buy' call with a target price of Rs 170 per share.
 
Goldman Sachs has maintained a 'Buy' call on the stock with a target price of Rs 185 per share. It noted that the company is well-placed to capture the accelerated shift to online in the food delivery space.