Will Zomato win the quick commerce race?

In the recent times, one of the stock that took a position in watchlist of many investors was ‘Zomato’ share. Zomato share recently crossed Rs. 2 lac crores market cap. The stock, even after the recent market correction, is still above 300 p/e. The company is operating in a future oriented segment. This industry is becoming more competitive with new players entering and the expansion of existing players.

Now, the main question here is, does the company really deserve this high p/e, and can the company succeed in its segment?

Indian quick commerce industry:

Zomato operates in the quick commerce industry, as everyone are aware. The quick commerce industry is expanding rapidly, especially after the Covid-19. ‘Quick commerce’ is different from ‘e-commerce’. ‘Quick commerce’ is a type of ‘e-commerce’, where the customers can expect the delivery of their ordered items within an hour. So the ‘time of delivery’ differentiates quick commerce and e-commerce.

According to the ‘Indus Valley Report, 2025‘ [downloadable file] by Blume, the monthly transacting user number [MTU], is expected to reach 128 million by FY31. Currently the MTU is at 26 million, as per the report. Due to ease of purchasing retail products, many households prefer buying through these quick commerce platforms.

As per the data by Chryseum [PDF file], the current market size of Indian quick commerce industry is estimated at 3.34 billion USD in 2024. Further, the data points out that, the ‘total addressable market‘ [TAM] of Indian quick commerce industry is 45 billion USD, which is still untapped. The TAM refers to the maximum opportunity available for a particular product or solution. This TAM is a imaginary value. No-one is expected to achieve this value in reality because of the competition that may exist in market. However it indicate the vast opportunities that exist. As per the report, it is anticipated that the Indian quick commerce industry would reach USD 9.95 billion by 2029, with an expected annual CAGR of 4.5% between 2024-2029.

The Indian quick commerce [QC] industry is expected to expand further into tier-2 and other smaller cities. All these indicate green flags in the QC industry.

Will the growth of QC be a cake walk?

The answer is no! All the above said positives exist. But, the competition overshadows all those green flags. There is also an news article by the Times of India, that highlights the competition existing in the Indian QC industry. As per the article, currently there are four major players existing in the Indian QC industry. These four, in the order of their dominant market position are, Blinkit, Swiggy Instamart, Zepto, and Big Basket [owned by Tata]. Of these four, the first three [other than Big Basket], face an intense competition among themselves.

Other than these, there are few new entrants which include, Jio Mart, Satvacart, Flipkart Minutes, and Amazon Tez. These are a few notable players. Out these, I believe Satvacart is the only entity without a strong brand backing. However it is considered as the only QC operator with demonstrably higher profits. All other players don’t require any introduction as they are already familiar to us.

All these QC entities are trying to expand their business and outperform their peers. An article in India Briefing points out high operating costs, and last mile delivery complexities as challenges along with intense competition.

In this scenario, only those QC operators who are able to deliver quickly, along with attractive price discounts, will succeed. So, to understand the intensity of competition we should look at the strategies followed by the giants like Flipkart and Amazon.

‘Dark Stores’- The game changer:

Dark store is basically a distribution center that facilitates ease of delivery for online orders or for the orders placed through any QC platforms. This dark store is the solution for the issues like high operating costs and complexities in last mile delivery. So all those QCs with a good dark store network will gain a competitive advantage. With a good dark store network, the companies can use the cost saved for providing a price discounts and also to encourage the delivery person.

How is the competition in QC industry?

The e-commerce giants Flipkart and Amazon are expanding their dark store network that intensifies the competition, as per a news report by the Times of India. Flipkart and Amazon already have their dark store network, so now they just need to add few more dark stores in each regions for competing with the existing leaders. Tata Digital, a subsidiary of Tata Sons, owns more than 60% of stake in Big Basket. The Tata Sons are considered to be dividend rich companies, as Tata Sons is the major recipient of the dividends from their subsidiaries. It’s in thousands of crores! Hence, even for Big Basket to take a disruptive market position in QC industry is not a big deal. Tata Sons can very easily use their dividend income to pump it into Big Basket and compete with other players. The point to be noted is, now Tata Sons is almost debt free, so for them investing in Big Basket is not a big task. Other than these three, even Reliance are planning to disrupt the QC industry.

All these players are not only expanding, but also diversifying with wide variety of product choices.

Where does Zomato stand currently?

Currently, Zomato is the leader in the QC industry with its brand called ‘Blinkit‘. This brand was acquired by Zomato. Zomato became profitable, for the first time, during mid of 2023. Even now their financial statements continues to show a profitable results. Their strategy is to penetrate in the tier 2 cities. Like their peers, even Zomato is expanding their dark store network very rapidly. Further, they have a plan to concentrate more on the existing cities. Like a cherry on the cake, they have well diversified portfolio that even includes electronic gadgets for delivering in 10 minutes. They have a very talented and dedicated management too. All their strategies indicate their interest in expanding fast.

What is p/e ratio?

Now looking at their plans and functioning, people may feel the valuation to be reasonable. But not! Many people ignore the p/e ratio. The p/e is the, ratio of share price of a stock to the ‘earnings per share’ [EPS]. Here the EPS is the ratio between the net income remaining after paying preferred dividends to the total number of outstanding shares of the company. Value investors consider 25 p/e as a standard p/e. The p/e indicates how much the investors are willing to pay to the company’s earnings. If the company earns more or has a potential to earn more, the p/e is likely to be higher. But, if the earnings doesn’t justify the p/e, then the stock might probably be overvalued.

Does Zomato share deserve 300 p/e?

In the case of Zomato, I viewed their quarterly financial statements for the past five quarters. Their quarterly results [unaudited], clearly reveals that their total revenue includes revenue from other sources. If we exclude this ‘other income’ then their profits are negligible or sometimes still in loss.

Of coarse, there are few valid reasons to it. As I said above, they are trying to expand very rapidly by increasing the number of dark stores they have. Secondly, they have incurred more on marketing campaigns. Other than these two major expenses, the delivery related costs have increased significantly. Further, they are under pressure to offer more price discounts and other offers to beat the competition.

The competition in the QC industry is forcing the company to reduce their profit margins [by offering price discounts and other offers], and quickly expand their dark store network. They are also planning to expand in small cities within one year. Further, even their increased advertisement costs are as a result of increase in the competition.

So I feel that, for this company to see a significant profits it may take a few more quarters. But, 300 p/e at this scenario is not reasonable. If we include the competition risks, then things become uncertain. It is difficult to predict the real winner. On one side we have e-commerce giants Amazon and Flipkart, on the other side we have Tata group. Apart from this, existing players like Zepto are trying to scale higher. So the road is not smooth for Zomato. But I hope the founder and his team would try their best to save the company and to bring it towards a more profitable entity.

Conclusion:

Zomato is expecting for the existing trend [low or flat profits] to continue even for few more quarters. The reason is, they are rapidly expanding their dark store network as said above. That means, it will take few more quarters for them to see a higher profit figures.

The company definitely has a good earning potential. But there is the risk of competition. At such a high valuation, we should wait for few more quarters to look at how the company makes profit and how the competition impact their business. Usually, purchasing a share at a high valuation will delay returns from the stock. This is because, it should adjust to the actual earnings and then move up from there. So even if a person is willing to hold Zomato shares for ten years, this is not the right time to invest in this stock. We should look at the impact of competition, and how the management tackles it. Only then we can properly forecast the stock. Entering at this price is riskier.

Hence, for the question “will Zomato win the quick commerce race?”, only the time should reply!

This is just my view. I’m just highlighting the risk associated with the stock. All the discussions above are only from the stock market perspective. This blog is not intended to hurt the feelings of any investors or any one related to the company.