Zomato had many positives in Q2. A fundraising plan overshadowed them all.

Growth rates are in line with management’s guidance. The company needs an average GOV of ₹7 lakh a day per store to achieve breakeven. It’s currently at ₹9.81 lakh, up 30% year-on-year, management said.

While the contribution margin (revenue minus variable costs) rose sequentially for food delivery, from 7.3% to 7.6%, it declined from 4% to 3.8% for quick commerce. This is the first time the quick commerce business has seen a sequential decline in the contribution margin. It remains to be seen whether this was because of the strategy of waiving delivery charges or offering promotional incentives by new stores.

Fundraise googly

Right now, though, the Street is more intrigued by the board’s approval of a sudden ₹8,500-crore fundraising plan. Since Zomato has a market capitalisation of ₹2.2 trillion, the equity dilution could be about 4%. For now, there is limited clarity on how the company plans to use these funds. In the earnings call, management only said that funds were needed to strengthen the balance sheet, though it did rule out using the cash for discounts to gain customers in quick commerce.

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The news comes as competitor Swiggy also looks to raise funds and competition in the quick commerce space heats up. Swiggy’s draft red herring prospectus showed it had investments worth ₹2,918 crore and ₹837 crore in cash equivalents of Q1FY25. Even if it raises ₹3,750 crore from the IPO, its cash pile would be around ₹7,500 crore, far smaller than Zomato’s ₹10,800 crore.

Reliance Retail also talked about making a renewed push in the quick commerce space – without any delivery fees – in its Q2FY25 results commentary, but then no amount of money would be enough to match its parent company’s financial might.

Blinkit expansion

Irrespective of the potential fundraise, Zomato is on target to have 1,000 Blinkit stores by March 2025 and 2,000 by December 2026. Blinkit saw its highest store-count addition of 152 in Q2FY25 and now has a total of 791 stores. The company has also not talked about any other inorganic growth initiative for the near-term. Also, it generated ₹288 crore of cash in Q2FY25, after accounting for working capital and capital expenditure, which shows annual cash surplus from operations could easily exceed ₹1,000 crore.

Nonetheless, the Street seems to have taken the modest equity dilution and management commentary in its stride, with the stock up around 3% on Wednesday.

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On the flipside, Zomato’s fixed costs rose 9% for food delivery and 20% for Blinkit sequentially, indicating that it continues investment in marketing. Though profit before tax (PAT) was ₹237 crore, almost the same as in Q1FY25, a tax outgo of ₹61 crore led to 30% sequential drop in PAT to ₹176 crore. As Zomato exhausted unabsorbed depreciation, it had to pay tax on treasury income.

Meanwhile, the stock is up more than 100% so far this calendar year. Zomato is likely to report earnings per share (EPS) of ₹4.3 for FY27, according to Bloomberg consensus estimates. The proposed equity dilution of 4% does not materially change this. The stock is trading at a P/E multiple of 60x based on Bloomberg’s estimates. The premium valuation may be because food delivery in India is a duopoly, but investors must not overlook the growing competition in quick commerce.

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