According to a report by Motilal Oswal Financial Services, the food delivery market in India is expected to grow at a compound annual rate of 19% between FY23-25, while other markets are experiencing a slowdown. This growth is expected to be driven by an increase in the number of transacting users and order frequency, resulting in a higher proportion of online food ordering.
The report suggests that online food ordering in India is set to reach a 24% share by FY25E, up from 13% in FY21. The report also includes an analysis of Zomato, with a target price of INR 70.
On April 17, the shares of the restaurant aggregator and food delivery company were trading at INR 53.42 apiece on the BSE, indicating a 0.76% decline.
According to the brokerage firm, the adoption of online delivery in India has been fueled by increasing internet penetration, urbanization, and consumption. With a projected internet user base of 1 billion by 2025, as estimated by Redseer, and only 9% of the population currently using the internet (in comparison to 36% in China and 50% in the US), there is a vast untapped market with plenty of room for growth. This suggests a long-term potential for growth in the sector.
As per MOFSL, the food delivery market in India has now become a stable duopoly with Zomato holding a 55% market share and Swiggy holding 45%, following Amazon’s exit. The high barrier to entry, requiring significant capital to displace the established players, creates a considerable competitive advantage or “moat” for the incumbents.
“We expect Zomato to gain from the relatively early stage of the food delivery ecosystem in India, as increased formalisation along with a growing share of platform-led delivery (currently at 7% of overall food consumption) should help boost its Food delivery gross order value (GOV) to INR 38,400 crore in FY25 from INR 21,300 crore in FY22.”
Financials & Growth:
According to research analysts Mukul Garg, Raj Prakash Bhanushali, and Pritesh Thakkar at MOFSL, Zomato is expected to achieve a robust 29% revenue compound annual growth rate (CAGR) between FY23 and FY25. This growth is anticipated to be driven by increased penetration, a higher proportion of users making transactions, and an increase in the frequency of orders.
Additionally, the analysts predict that Zomato will reach breakeven by FY25, building on the food business segment’s EBITDA level breakeven achieved in 1QFY23. MOFSL also expects Zomato’s gross margin to improve significantly from 5.3% in FY22 to 33.5% in FY25.
Additionally, the brokerage noted that Zomato Gold is anticipated to contribute to the company’s growth. The early indications of Gold adoption are positive, with 900,000 users signing up in the first month alone. The brokerage believes that this trend will help Zomato to improve its growth trajectory, as the frequency of orders is expected to increase after declining in recent quarters.
However, MOFSL also expressed concern about the limited differentiation between Zomato and Swiggy’s offerings, with both companies providing food delivery, dine-in, and quick commerce services. A fragmented market without a clear leader could negatively impact margins due to the absence of efficiency gains from order bunching. MOFSL anticipates a contribution margin of 5.6% of gross order value (GOV) for Zomato in FY25E, compared to its medium-term target of 8%.
