The food delivery market in India is likely to see 13-14 percent growth in the coming years and a stable-state EBITDA margin of 5 percent, according to a new report, which added that competitive intensity is moderating in quick commerce which should continue to drive stocks in the near term.
Competitive intensity in the quick commerce market seems a lot more benign than it was six months ago.
“To be fair there is no dearth of capital for most players even now but as discussed in our earlier note, we believe the incremental benefit of high cash burn is diminishing now,” according to a HSBC Global Investment Research report.
Companies are likely to focus now on improving utilisation of existing assets and maintaining a high retention ratio of customers acquired over the past year.
“Overall, we think that near-term growth is likely to remain strong and profitability should gradually improve as well,” the report added.
In the past few quarters, variable costs such as picker and delivery partner salaries have moved up, but “we have seen some stability lately in dark store cost trends”.
Corporate-level costs (management and technology) are around 5 per cent of gross order value (GOV) currently, which “we believe can come down to around 2-3 per cent in 4-5 years as business scales up”.
Key investor discussion remains around the valuation benchmark for this business.
“With a duopoly industry structure and very low reinvestment rate, we think valuations for Zomato should be at least the average of the other consumer discretionary companies in India,” the report noted.
Most of the discretionary companies in India trade in an EV/EBITDA range of 15-60x and hence “we apply a 40x EV/EBITDA target multiple for Zomato. The company has significant tax-assets as well and hence, on price-to-earnings (PE) basis, it appears cheaper than its peer group”, said the HSBC report.
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