A month after introducing a platform fee of INR 2, which was later raised to INR 3 for certain users, Zomato, the foodtech giant, is now receiving an optimistic outlook from Kotak Institutional Equities. They believe that this fee increase will enhance the company’s customer take rate and contribution margin.

“On the app, Zomato says, ‘This small fee helps us pay the bills so that we can keep Zomato running.’ We note that over the past few quarters, bulk of the take-rate improvement has been driven by a restaurant take-rate increase and delivery take-rate has lagged,” the analysts at the brokerage said.

“The company’s intent seems to be to monetise select customers better, resulting in an increase in customer take-rate, which flatlined over the past few quarters,” said the analysts.

To put it plainly, the take rate represents the commission collected by Zomato from both restaurants and customers as a fee for facilitating an order.

Early last month, Zomato, following the footsteps of its competitor Swiggy, introduced a platform fee of INR 2 per order for select users on its platform. In a matter of weeks, Zomato escalated this platform fee to INR 3 for customers residing in certain cities.

Read More: Zomato follows Swiggy’s lead, tests INR 2 platform fee to enhance profitability

Also Read: Zomato extends platform fee to wider user base, implements INR 3 charge in select cities

Regarding inquiries concerning this matter, a Zomato spokesperson has stated that the platform fee is intended to apply to all customers. However, it’s important to note that these adjustments are currently in the experimental phase and are being implemented gradually throughout the country.

Providing an analysis of how the platform fee could boost Zomato’s profit margins, Kotak Institutional Equities stated that Zomato had approximately 2.7 million high-frequency customers in 2022, each placing orders more than 50 times annually. If we assume that these customers make an average of 75 transactions per year, then applying an INR 2 platform fee to all these orders would generate an additional INR 40.5 crore in profit/EBITDA contribution.

The analysts noted that this would also result in approximately a 16 basis points (bps) improvement in the contribution margin. This improvement would assist Zomato in progressing towards its aimed 8% margin as a percentage of Gross Merchandise Value (GMV) over the medium term.

In the first quarter of fiscal year 2024 (Q1 FY24), Zomato’s food delivery business achieved a contribution margin of 6.4%.

Kotak reaffirmed its ‘buy’ rating on Zomato and adjusted the stock’s fair value to INR 110, up from the previous INR 105. This adjustment suggests a potential upside of 12% from its most recent closing price.

Additionally, Kotak highlighted that should Zomato expand the scale of its operations and exercise effective cost management in its ecommerce ventures, namely Blinkit and B2B business Hyperpure, these segments have the potential to attain profitability in the coming quarters.

In the first quarter of fiscal year 2024 (Q1 FY24), Zomato recorded a net profit of INR 2 crore, accompanied by operating revenue amounting to INR 2,416 crore.

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

At the close of Tuesday’s trading session, Zomato’s shares concluded with a slight increase, reaching INR 98.2 on the BSE.