How did Deepinder Goyal turn Zomato from a falling knife into a market marvel?

Who could have foreseen that what began as Foodiebay, a modest online restaurant directory, would evolve into one of India’s most coveted start-ups, shaping the nation’s business landscape under Founder, Managing Director and Chief Executive Officer Deepinder Goyal?

THE GROWTH STORY

Zomato’s resurgence wasn’t a game of chance. It was the result of strategic acquisitions and a willingness to diversify. “Zomato took some brave steps. From acquiring Blinkit [formerly Grofers] and foraying into quick commerce to event-ticketing and going-out businesses, the company is growing by adding more services,” says Aakash Agrawal, Head-Digital and New-Age businesses at Anand Rathi Investment Banking, a financial services platform. Zomato’s B2B venture, Hyperpure, a supplier of ingredients and kitchen products to restaurants, has also added to this ecosystem of growth.

In August 2023, Zomato hit a major milestone—it turned profitable for the first time in 15 years, reporting a net profit of Rs 2 crore for the quarter ended June 30, 2023. This was a marked improvement over the Rs 186 crore loss it had reported the previous year. The operating revenue also saw a 70% increase year-on-year (YoY), reaching Rs 2,416 crore.

Akshant Goyal, Zomato’s CFO, reflected this optimism in a recent letter to shareholders, noting that the company expects 40%+ annual adjusted revenue growth over the coming years, driven by its established customer base and diversified business model.

Bolstered by a strong ecosystem, Zomato’s financial outlook has garnered interest from major players in the finance industry. Shrikant Chouhan, Head of Equity Research at Kotak Securities, an investment and trading platform, projects Zomato’s revenue to grow at a compound annual growth rate (CAGR) of 49% from FY24 to FY27. He expects significant profitability gains, with earnings (consolidated net profit) rising from about Rs 350 crore in FY24 to an estimated Rs 3,320 crore by FY27. EPS, or earnings per share, is expected to hit Rs 2.5 by FY26 and Rs 3.6 by FY27. Kotak has assigned a ‘buy’ rating on the stock, setting a fair value target of Rs 310.

As Agrawal points out, “The challenge was proving to traditional investors that Zomato’s investments in customer acquisition were akin to fixed assets, as marketplace businesses gain momentum over time.”

Zomato’s average market capitalisation between October 2023 and September 2024 was Rs 1.55 lakh crore, with its stock hitting an all-time high of `298 during the period.

MODUS OPERANDI

Zomato owes its success to the ‘flywheel’ effect—a business model where small wins accumulate over time, making one’s venture profitable eventually. “There’s a strong hook and a solid flywheel effect in this marketplace model, especially when the first or second player dominates, as we’ve seen with Zomato and Swiggy,” says Agrawal.

Zomato’s acquisition of Blinkit has cemented its leadership in the quick commerce market. According to a 2024 JM Financial report, Blinkit is the current leader in quick commerce, although Zepto is identified as a “dark horse”.

Chouhan of Kotak Securities notes that the gross order value (GOV) of Zomato’s food delivery business grew 21.4% in Q2FY25, with contribution margins improving to 7.6%, up from 7.3% in Q1FY25—a result of more efficient cost management. Blinkit saw even stronger growth, with a 122% YoY increase in GOV and a 24.6% quarterly increase, indicating robust demand. Its contribution margin remained solid, with minimal losses in the segment. With over 500 dark stores, nearly double from a year ago, Blinkit’s quick commerce GOV was recorded at approximately `25,000 crore ($3 billion), close to achieving Ebitda positivity.

“We maintain a ‘buy’ rating on Zomato, as its food delivery business continues to perform strongly, gaining market share and generating more cash. Blinkit stands as the leading player in the quick commerce space,” says Chouhan. He adds that Zomato’s recent ventures in the ‘going out’ business (District) and B2B vertical Hyperpure are still developing, but represent substantial growth opportunities.

While Zomato’s expansion into multiple service areas has been critical to its growth, the company remains acutely aware of its capital needs. Goyal, in a recent letter to shareholders, highlighted Zomato’s consolidated annualised revenue growth of four times since its IPO—from `4,640 crore in July 2021 to Rs 20,508 crore in Q2FY25 (annualised). However, the cash balance has decreased from Rs 14,400 crore to around Rs 10,800 crore, primarily due to funding losses in the quick commerce segment and some equity investments.

“While the business is now generating cash (vis-à-vis a loss-making business at the time of IPO), we believe that we need to enhance our cash balance, given the competitive landscape and the much larger scale of our business today,” Goyal shared. “We believe that capital by itself does not give anyone the right to win (and that service quality is the key determinant of success), but we want to ensure that we are on a level playing field with our competitors, who continue to raise additional capital.”

Zomato’s confidence in its future valuation is underpinned by the potential of its quick commerce and going-out businesses, which Agrawal estimates could account for $13-15 billion of its current $30 billion valuation. With revenue targets estimated by experts between `330-340 per share over the next five years, the company is setting its sights on a sustainable future beyond food delivery. As Zomato continues on its ambitious path, it is redefining what a consumer tech company can achieve. Its evolution—from an online food repository to an ecosystem—shows the tech company’s resilience.

For those who doubted Zomato, the game isn’t over until the final whistle!

@PalakAgarwal64