Zomato share price: Can ONDC food delivery app create competition, price war? A closer look over the horizon!

Although ONDC was founded on December 31, 2021, it gained popularity when the app started to process 25,000 orders per day across food, grocery, and retail, a significant ramp-up from nil earlier in the year.

Now fintech player Zomato does have a similar business right from online food delivery to groceries. And looking at the run rate of ONDC per day, many eyebrows were raised on whether the latter can stir competition with existing aggregators such as Zomato.

ONDC is also being compared to the unified payments interface (UPI), a government-backed payment system that has managed to disrupt the digital wallet payments ecosystem since its inception.

So does ONDC has what it takes to outrun biggies like Zomato?

On ONDC, sellers have the options to either collect delivery costs upfront from customers or subsidize the delivery cost for the customers.

Among the key reasons why ONDC has such a high run rate in deliveries is largely due to ONDC-funded discounts to customers. In some cases, the cost of ordering food on ONDC, at least in some cases, seems to be lower than on Zomato/Swiggy, but Kotak Institutional Equities believe this practice “may not sustain”.

In December 2022 quarter, Zomato recorded 330,000 average active monthly riders — significantly higher compared to aggregators such as Shadowfax and Dunzo.

In its research note, Kotak explained that the cost of delivery per order is heavily dependent on orders per day delivered by a rider.

Explaining in detail why ONDC-funded discounts may not be sustainable, JM Financial analysts in their note said, “Our channel checks suggest most restaurants currently on ONDC have been onboarded through Magicpin (seller app), which also operates its own platform.”

As per JM Financial’s note, Magicpin charges 7-10% commission rates on net sale value (NSV) for discovery (restaurant bears the cost of delivery or the customer pays for delivery cost upfront) and 20-22% for discovery plus delivery (restaurant effectively bears the cost of delivery).

” Our conversations with restaurants onboarded on ONDC through Magicpin suggest that these commission rates have not changed for orders that they receive through ONDC. This means Magicpin has not yet started charging restaurants towards commissions that it has to shell out towards the Buyer app commissions (~3% for Paytm, according to media reports) and commissions that it would have to share with ONDC (which is not charging currently but could charge the seller app 1-2% on a sustainable basis),” JM Financial’s note added.

Therefore, the brokerage does not believe that current commission rates are grossly subsidised. This means commission rates on ONDC have the potential to go up to 10-16% for discovery itself.

Currently, Zomato earns 21-22% commissions on NSV from restaurants. However, these commissions also include ad income (2-3% of NSV) and delivery commissions that in turn are used to subsidise customer delivery fees (9-10% of NSV).

Adjusting for these, the brokerage’s note added, “Zomato’s discovery commission as % of NSV works out to just 9-10%, which is broadly comparable to the current commissions of seller apps on ONDC.”

Hence, the analysts believe ONDC- and Buyer/Seller apps-funded discounts/subsidies are unlikely to sustain over the long term due to limited appetite to incur losses (unlike the vertical focussed players such as Swiggy and Zomato). This is because ONDC last received a capital infusion of around ₹2 billion, which was supposed to last for about 2 years. Daily orders on ONDC are currently around 20-25k versus 1.5 million -1.6 million each for Swiggy and Zomato.

Let’s assume that ONDC does manage to receive 100l orders daily with per order discount of about ₹100, as per JM Financial, the platform will burn out all its cash in six months only.

In fact, ONDC has already started capping the burn by setting a daily incentive threshold of ₹225k per seller-side app (in addition to a maximum of three discounted orders per user and a cap of ₹3,750 per seller per day). Delivery subsidies are also getting capped at 2k orders per buyer app.

In this regard, JM Financial’s report said, “We also do not believe the Buyer/Seller apps have significant appetite to expand their exposure in the food delivery category by burning cash amidst the ongoing funding winter in the global start-up ecosystem.”

That being said, JM added that ONDC in its current shape and form is nowhere close to shaking up the online food-tech industry. The brokerage’s opinion is based on certain primary checks as well as a deeper analysis of the publicly available data.

Hence, it has recommended a buy on Zomato’s share price. The 12-month target price is set at ₹100 per share.

Similarly, Kotak’s note said, “We believe Zomato will score better on this metric than peers on account of the larger size of its network. Further, the time taken to deliver food is an important metric. We believe third-party aggregators have the capabilities to do well in the 60-120 min delivery window, but would falter in the 30-45 min delivery window, in which Zomato operates given the many-to-many delivery model (no hub).”

Kotak Institutional Equities peg Zomato’s variable cost of delivery at Rs75/order for FY2023. This includes Rs57 in delivery costs and Rs18 in other expenses. Over time, Zomato has significantly reduced incentives/discounts, and thus a significant part of other expenses is customer and restaurant appeasement expense (cost of cancelled orders, refunds due to quality issues, call center expense, etc.)

Likewise, Kotak has also recommended buying on Zomato for a target price of ₹82 per share.

Zomato is yet to announce its fourth quarter results for FY23.

On BSE, Zomato stock traded at ₹63.99 apiece up by 1.70% on Wednesday, at the time of writing. This was the stock’s intraday high. In a month, Zomato shares have skyrocketed by nearly 20% on the exchange.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.