Why Zomato is a fundamental investor's nightmare

Highlight

• Zomato founder says newly acquired Blinkit will grow faster than the parent company


• Blinkit is expected to reach Zomato's level at one-tenth the speed


• With changing business models, creating financial models for such companies is difficult


• Where market share gains precedence over profitability, value investors may avoid such companies

For a traditional fund manager or an investor relying on fundamental analysis for investment decisions, investing in new-age companies such as Zomato and Swiggy may seem inconceivable. Forget projecting future financial numbers; one should have the foresight to visualize these companies' future business models.

Consider the example of Zomato, where the company's founder, Deepinder Goyal, emphasizes that Zomato has significantly transformed since its inception 16 years ago. The company has undergone several iterations of its business model before reaching its current iteration, which Goyal calls Zomato 4.0.

The core business strategy of the company revolves around disruption. In a conversation with Sanjeev Bikhchandani, co-founder and vice-chairman of Info Edge India, who is also an investor in Zomato, Goyal emphasized, "For us, it's all about how we disrupt our own businesses."

The company is actively investing in concepts that have the potential to disrupt its current operations. Goyal indicates that these new concepts could lead to the emergence of a Zomato version 5 or a Blinkit version 2.

Acknowledging that Blinkit is projected to surpass Zomato in size within a year, Goyal expressed uncertainty about the longevity of Zomato's relevance.

While this approach may garner praise at a startup conference, it presents a daunting prospect for fund managers when the founder's confidence in the business model is uncertain.

Blinkit was a gamble that worked out for Goyal and is now the company's core business model. However, the company is now climbing up the value chain and will confront the big boys of e-commerce.

Most of the quick deliveries through Blinkit are related to food, which are low-value items. To enhance its per-order value, the company is diversifying its offerings.

The average order value (AOV) for Blinkit has seen an increase, reaching Rs 635 from Rs 553 a year earlier and Rs 607 in the September quarter. To further boost the AOV, Blinkit aims to introduce higher-value product categories such as electronics, fashion, and home appliances. In preparation for this expansion, Blinkit has urged its suppliers to expand their inventory, gearing up to compete with established e-commerce platforms like Flipkart.

Interestingly, Flipkart, recognizing the potential in quick delivery services, has announced plans to venture into this domain, potentially posing a challenge to Blinkit's growth trajectory. Nevertheless, the market for quick delivery services remains substantial, offering ample opportunities for both companies.

According to a Bank of America (BofA) report, the current addressable market for q-commerce stands at approximately 25 million households, with a potential monthly expenditure averaging between Rs 4,000 to Rs 5,000 per household. The expansion of q-commerce services is expected to reach 45-55 cities within the next three to five years, up from the current 25 cities, as per the plans outlined by the top three industry players.

However, this projection is subject to rapid change with the emergence of new disruptions or the entry of additional competitors, which could further erode profit margins. Goyal articulated this uncertainty, stating, "None of the business models that are being created right now will last beyond a decade because with all the tech and distribution systems that are changing. You have to innovate and create new businesses from the outcomes you've created so far if you want to last longer."

These disruptive new-age enterprises rely heavily on financial backing and can only maintain long-term sustainability with adequate funding. Bikhchandani encapsulates the essence of these ventures by highlighting that startups, especially when faced with well-funded competitors, cannot survive without substantial financial support. He emphasizes that despite facing losses and cash burn, a well-executed plan can navigate a startup out of such predicaments.

For investors inclined towards risk and eager to support companies focused on top-line growth and market share expansion, Zomato represents an enticing investment opportunity. For die-hard Warren Buffett and Rakesh Jhunjhunwala fans, Zomato and Blinkit will be companies where you can get your food delivered quickly. The recent reduction in the valuation of Flipkart by its parent company, Walmart, after two years of acquisition serves as a testament to the evolving landscape of these ventures.