Zomato increases platform fee by 25%, halts Intercity Legends service
Zomato has announced a 25% increase in its platform fee, taking it to ₹5 per order, ahead of its financial results for the March quarter. This move coincides with the temporary halt of its inter-city food delivery service, Intercity Legends. The platform fee was initially set at ₹2 in August 2023 to enhance margins and profitability, and has witnessed several hikes since then. The increase is currently only effective in certain cities.
Market responds positively to platform fee increase
The January increase in the platform fee was met with a positive response from the market, as reflected in Zomato's share price. Analysts suggest that this hike could help offset the impact of GST on delivery charges. With Zomato handling an estimated 85-90 crore orders annually, a ₹1 rise in convenience fee across all regions, could lead to a positive impact of ₹85-90 crore on EBITDA. This translates to approximately a 5% positive effect on EBITDA.
Zomato temporarily discontinues Intercity Legends service
Alongside the fee hike, Zomato has temporarily suspended its Intercity Legends service, which allowed customers to order from top restaurants in other cities. Users trying to access the 'Legends' tab in the Zomato app are now greeted with a message stating "Enhancements are underway. Please stay tuned as we will be back to serve you soon."
Profitability and expansion drive stock price up
Zomato's stock price has been on an upward trajectory due to increased profitability in its core business, and the rapid expansion of its quick commerce division, Blinkit. In the December quarter, Zomato's food delivery business reported a 30% year-on-year (YoY) rise in adjusted revenue, clocking ₹2,025 crore on a consolidated basis. Meanwhile, Blinkit doubled its earnings to ₹644 crore during this period.
Significant improvement in net profit reported
The company reported a consolidated net profit of ₹138 crore, marking a significant turnaround from the net loss of ₹347 crore in the same period the previous year. Revenue surged to ₹3,288 crore from ₹1,948 crore YoY. The firm's share is trading at 115 times forward earnings, well above multiples for global peers, including Uber, Deliveroo, and Meituan.
Analysts predict increased profit for Blinkit
Goldman Sachs expects profit forecasts to rise for Zomato's "quick commerce" business, Blinkit, according to analyst Manish Adukia. He noted that while "earlier investor conversations suggested skepticism around profitability of this business model," worries should ease as more results are reported. ICICI Securities Ltd. analyst Abhishek Banerjee stated that the high valuations for Zomato seemed justified given the "significantly higher" projected revenue as well as profits for the company.
