Zomato’s Blinkit Expansion Pushes Profits Lower

Zomato’s aggressive expansion of its quick commerce business, Blinkit, has been a double-edged sword, leading to a notable dip in the company’s profitability in its Q3 earnings for the December quarter. The food delivery aggregator reported a significant 57 percent drop in net profit, with losses being mainly attributed to high expenditure on opening new centers to support Blinkit’s rapid growth.

While the stock has taken a hit after the weak Q3 performance, several brokerages remain optimistic about Zomato’s long-term prospects, pointing to the company’s ability to execute its strategy effectively despite short-term challenges.

Shares of Zomato plunged by nearly 9 percent on January 21, following the release of the Q3 results on January 20, marking the largest decline since June 2024. At 09:23 am on January 21, Zomato’s stock was trading at Rs 224.15 on the NSE, reflecting the market’s reaction to the disappointing numbers.

Despite the drop in stock price, many analysts have retained positive outlooks, citing the company’s strong execution record and its strategic positioning in the competitive quick commerce market.

Zomato’s aggressive investment in Blinkit’s store expansion has played a significant role in inflating its losses. Blinkit, which was acquired by Zomato in 2022, is now a key player in the quick commerce space, with the aim of delivering groceries and other essentials in a matter of minutes. However, to support this ambitious growth, Zomato has had to ramp up its investments, resulting in a large upfront cost to establish more dark stores (micro-warehouses), leading to mounting losses.

Brokerages like Nomura have acknowledged the increased competition in the quick commerce sector but remain confident about Blinkit’s ability to secure a leading position in the market. Nomura highlighted the company’s strong balance sheet and its track record of solid execution, positioning Blinkit to remain in the top two quick commerce players in India.

Additionally, Nomura cited Zomato’s robust strategy and the company’s ability to manage its growth trajectory as positive factors in the long run.

Jefferies also maintains an optimistic view of Zomato’s quick commerce expansion, despite the challenges faced in Q3. The brokerage stated that Zomato’s aggressive store addition strategy could force competitors to follow suit, eventually leading to a stronger market position for Blinkit. However, Jefferies lowered its price target for Zomato to Rs 255, down by 7 percent, to account for the sharp decline in profitability in the latest quarter.

The firm emphasized the strong execution of Blinkit, which it believes will enable Zomato to weather the short-term margin pressures and emerge stronger over time.

Similarly, Bernstein remains bullish on Zomato, particularly on Blinkit’s aggressive dark store addition strategy. The firm expressed confidence that the company’s investments in its quick commerce business will pay off in the long term. Bernstein raised a key point about Zomato’s food delivery business, which exceeded expectations in terms of margin improvement during Q3.

This performance in the food delivery segment is seen as a stabilizing factor while Blinkit focuses on expanding its presence in the quick commerce space. Bernstein reaffirmed its ‘outperform’ rating for Zomato with a price target of Rs 310, despite the stock’s recent correction.

Nuvama Institutional Equities also shared a positive outlook, noting that Blinkit’s rapid expansion is driving faster growth. Although the added costs related to new store openings may hurt profitability in the short term, Nuvama believes these investments will result in higher margins and profitability in future quarters as these stores mature.

As a result, Nuvama revised its price target for Zomato downward by 8 percent to Rs 300, but maintained a ‘buy’ rating, pointing to the company’s long-term growth potential.

In its earnings report, Zomato revealed that its consolidated net profit for Q3 fell to Rs 59 crore, down from Rs 138 crore in the same period last year. Despite the drop in profit, the company experienced a nearly 22 percent growth in revenue from its food delivery business, which continues to show resilience.

Furthermore, Blinkit saw a more than twofold increase in revenue, signaling strong growth in the quick commerce segment. However, the company noted that the rapid expansion of Blinkit resulted in an increase in quarterly losses, which grew by Rs 95 crore compared to the previous quarter.

Zomato:-

While Zomato’s Q3 results reflect the growing pains of an aggressive expansion strategy, brokerages remain confident that the company’s investment in Blinkit will pay off in the long run. The quick commerce space is highly competitive, but Blinkit’s strong execution and the company’s ability to scale its operations rapidly give it an edge in securing a strong position in the market.

Despite short-term profitability challenges, analysts continue to see Zomato as a long-term growth story in the food delivery and quick commerce sectors.

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