Zomato's Q3 results have caused quite a stir in the market, leading to a significant 7% drop in Zomato share value. This sharp decline has left investors and market watchers wondering what went wrong. Let’s dive into the three primary reasons behind this sudden crash and understand what it means for the company's future.
1) Aggressive Store Addition
One of the biggest culprits behind the drop in Zomato share price is its aggressive strategy to expand Blinkit, its quick commerce platform. Zomato’s Q3 net profit fell by a staggering 57% due to increased spending on opening new Blinkit centers. According to the company, consolidated Adjusted EBITDA dropped by 14% (approximately Rs 45 crore) compared to the previous quarter. This decline occurred despite improvements in food delivery margins.
CEO Deepinder Goyal explained, “The losses in our quick commerce business this quarter are largely on account of pulling forward the growth investments that we would have otherwise made in a staggered manner over the next few quarters. We aim to achieve our target of 2,000 Blinkit stores by December 2025, a year earlier than our initial guidance.”
While this accelerated expansion shows ambition, it has put pressure on margins, causing concerns among investors. At the close of trading, Zomato share value on the BSE dropped 7.27% to Rs 221 per share.
2) Growth Slowdown
Another factor contributing to the decline in Zomato share price is the slowdown in Gross Order Value (GOV) growth. For the food delivery business, GOV grew by just 2% sequentially. While the company remains optimistic about achieving over 20% YoY GOV growth in the long term, the current broad-based slowdown in demand has raised red flags.
Rakesh Ranjan, CEO of the Food Delivery Business at Zomato, stated, “We are positive about a recovery soon, despite the current slowdown. The fundamentals remain strong, and we expect long-term yearly growth of over 20%.”
Additionally, Zomato’s new District app has added to quarterly losses. Investments in marketing, technology, and team-building for the app have yet to yield substantial returns. The company expects to operate at a loss for the next year as it focuses on customer transition and platform growth.
3) Rising Employee Costs
The third reason for the drop in Zomato share price is the rise in employee costs. These costs surged due to:
A 21% QoQ increase in ESOP charges.
A 15% QoQ rise in cash employee benefit expenses.
The quick commerce business, in particular, has driven up hiring costs due to heightened competition. CFO Akshant Goyal noted, “The war for talent will likely continue for the next few quarters. We expect employee costs to remain elevated in the near term but aim to bring them down to 6-8% of Adjusted Revenue by FY26.”
This ongoing battle for talent and increased hiring expenses have weighed heavily on Zomato’s bottom line, further unsettling investors.
Zomato Q3 Performance Overview
Zomato’s overall performance for Q3 paints a mixed picture:
Net profit fell 57% to Rs 59 crore, compared to Rs 138 crore in the same quarter last year.
Revenue from the food delivery business grew nearly 22%.
Blinkit revenue more than doubled, highlighting the potential of the quick commerce segment despite its current losses.
What Does This Mean for Investors?
The decline in Zomato share price underscores the challenges of balancing aggressive growth with profitability. While the company’s ambitious expansion plans for Blinkit and the District app indicate a strong vision for the future, the short-term financial impact has spooked investors.
The slowdown in GOV growth and rising costs add to the uncertainty. However, if Zomato can achieve its long-term growth targets and streamline its operations, there may still be significant potential for recovery and growth.
Read More: Startup news and funding
Conclusion
In summary, the 7% drop in Zomato share price reflects the market’s concerns about the company’s Q3 results. Aggressive store additions, a slowdown in growth, and rising employee costs have collectively contributed to this decline. While the road ahead may be bumpy, Zomato’s focus on long-term growth and its strong fundamentals could pave the way for a brighter future.
As with any investment, it’s essential to weigh the risks and rewards. For now, all eyes are on how Zomato navigates these challenges and delivers on its ambitious goals.
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