Zomato Q4 Results Review: Employee Costs to Drop Despite Higher ESOP Expenses

Analysts anticipate that Zomato Ltd.'s employee costs may decrease despite expectations of rising costs due to its employee stock ownership plan (ESOP) in the near future.

Most brokerages have maintained their ratings and increased the target price for Zomato's stock, anticipating the company's strong performance in the quick commerce sector given its dominant market position.

During January–March, Zomato increased its ESOP grants to Blinkit's leadership team and senior employees, according to UBS. "An additional ESOP pool of 2% of outstanding shares has been proposed to be created."

UBS predicts further increases in ESOPs while expecting overall employee costs to trend downward.

Karan Taurani, Senior Vice President at Elara Capital, commented on the valuation, stating, "The food business is expected to command a premium, which diminishes ESOP concerns. ESOP discussions are likely to persist for the next five years, leading us to adjust our EBITDA estimate for the food business."

According to Citi Research's note on Tuesday, Zomato's management aims to accelerate the expansion of dark stores and maintain adjusted EBITDA in quick commerce for FY25.

Taurani of Elara Capital highlighted Blinkit's aggressive strategy, stating that their market share has grown to 35–40%. "If they continue expanding aggressively over the next year and penetrate markets dominated by competitors, Blinkit could capture 50% market share."

Only Blinkit has the capacity to generate significant advertising revenue, contributing to profitability and commanding a premium compared to its peers.

Despite rapid expansion in the Blinkit space, adjusted EBITDA is expected to remain around zero for the next four to five quarters, with a medium-term target of 4-5%.

• Revenue at Rs 3,562 crore vs Rs 3,288 crore

• Ebitda rises 69% to Rs 86 crore.

• Ebitda margin at 2.4% vs 1.6%

• Net profit rises 27% to Rs 175 crore.

• UBS maintains 'buy' on Zomato at Rs 250 target, which implied a 27% upside from Monday's closing price.

• Fourth-quarter revenues and gross order value, or GOV, were in line, but Ebitda missed estimates on higher employee costs.

• The dip in food delivery GOV was due to seasonality.

• For the next couple of years, the guidance of 40%+ YoY growth in adjusted revenues holds.

• ESOP costs are expected to go up further, but overall, employee costs as a percentage of revenue are expected to trend downward.

• Citi Research kept a 'buy' rating on the stock and raised the target price to Rs 235 from Rs 220.

• The current target price implies a 20.95% upside from Monday's closing price.

• The brokerage raised its target multiple to 65 times on account of strong quick commerce.

• In FY25, Blinkit will increase its contribution to the business.

• The margin outlook, pushed out yet in tact in the medium term,.

• Management is confident about dark store growth because of stable growth in Delhi-NCR and the traction seen in the next set of cities.

• The brokerage expects GOV growth to be 71% and 39% in fiscal 2025 and 2026, respectively, compared to 57% and 16% earlier. The adjusted Ebitda margins during the same year is seen at 0.6% and 3.1% versus 2.0% and 4.1% earlier, respectively.

• The brokerage raised the price target to Rs 230 from Rs 180 on Tuesday, according to Bloomberg's data.

• The current target price implies a 20.95% upside from Monday's closing price.

• Zomato Ltd.'s consolidated adjusted revenue and Ebitda exceeded brokerage expectations.

• Growth in food delivery Ebitda was led by better-than-expected contribution margins of 7.5%, the brokerage said.

• Store expansion plan to keep quick commerce business Ebitda at break even in the next few quarters

• Upside risk: faster-than-expected execution in new adjacencies

• Downside risk: labour law changes, entry of a new food delivery player, disruption from ONDC

Shares of Zomato Ltd. fell over 6% to a one-week low on Tuesday after its earnings before interest, tax, depreciation, and amortisation, or Ebitda, to miss analysts' estimates owning to higher employee costs.

Zomato Ltd. declined 6.28% to Rs 182.10, the lowest level since May 7. It was trading 2.21% down at Rs 190.00 as of 11:20 a.m., as compared to 0.38% advance in the NSE Nifty 50 index. 

The gained 197.96% in 12 months, and on year-to-date basis it has risen 53.6%. Total traded volume so far in the day stood at 5.1 times its 30-day average. The relative strength index was at 51.10.

Out of 28 analysts tracking the company, 24 maintain a 'buy' rating, one recommends a 'hold,' and three suggest 'sell', according to Bloomberg data. The average 12-month consensus price target implies an upside of 202.6%.