Kotak Institutional Equities has increased the per-share fair value of Zomato, the food and grocery delivery platform, to INR 125, up from its previous estimate of INR 100.

The rise in fair value, as per details presented in the company’s FY23 annual report, primarily stems from the robust increase in the contribution margin for food delivery. This margin surged from INR 6.6 per order in FY22 to INR 18.5 in FY23, driven by enhanced revenues and effective cost optimization, as reported by the brokerage firm.

Contribution margin signifies the income a company generates from the sale of each additional unit of a product.

Kotak has assessed the food delivery segment of Zomato with a valuation of INR 83,100 crore, utilizing a discounted cash flow (DCF) valuation approach. Alongside food delivery, Zomato also manages the quick commerce platform Blinkit and the business-to-business grocery sourcing service Hyperpure.

Zomato’s contribution margin boost was primarily fueled by a significant INR 6.3 increase in revenue per order. Kotak attributed INR 2.7 of this increase to a higher take rate and INR 3.6 to augmented advertising revenue. Furthermore, there was a INR 5.2 reduction in variable costs per order due to decreased discounts and other expenses, along with a minor INR 0.4 decrease in delivery costs per order.

During FY23, Zomato’s food delivery business observed a 2% year-on-year rise in the average order value, reaching INR 407.

Zomato’s operating revenue in FY23 amounted to INR 7,080 crore, a significant increase from INR 4,190 crore in FY22. Notably, the company’s operating revenue from food delivery witnessed a 33% year-on-year growth, reaching INR 4,530 crore in FY23.

In the June quarter of FY24, Zomato reported its first-ever quarterly net profit of INR 2 crore, which propelled its stock price to new 52-week highs. On October 18, the stock reached INR 115 per share, coming close to a market capitalization of $12 billion.

Read More: Zomato turns profitable in Q1 FY24, reports INR 2 Cr consolidated PAT

On Wednesday, the stock concluded at INR 108.15 on the BSE, marking a 0.69% decrease from its previous closing price.

For the quarter concluding on September 30, UBS, a brokerage firm, projected a 10% sequential expansion in India’s food delivery market. In a report dated October 10, UBS estimated that Zomato experienced month-on-month volume growth of 2% in July and 4% in August. However, this lags behind Swiggy’s volume growth of 7% and 6% for the corresponding months, as indicated in the report.