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Although ONDC was launched on December 31, 2021, it gained popularity when the app began processing 25,000 orders per day across food, grocery and retail, a significant increase from zero earlier this year.

Now fintech player Zomato has a similar business, from online food delivery to groceries. And looking at ONDC’s run rate on a day-to-day basis, many eyebrows were raised over whether the latter can fuel competition with existing aggregators like Zomato.

ONDC has also been compared to the Unified Payments Interface (UPI), a government-backed payment system that has disrupted the digital wallet payment ecosystem from its inception.

So does ONDC have what it takes to avoid biggies like Zomato?

On ONDC, merchants have the option of pre-collecting delivery charges from customers or subsidizing delivery charges for the customers.

One of the main reasons ONDC has such a fast delivery rate is largely due to ONDC-funded rebates to customers. In some cases, the cost of ordering food on ONDC appears to be, at least in some cases, lower than on Zomato/Swiggy, but Kotak Institutional Equities believes this practice “might not last.”

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

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

Explaining in detail why discounts funded by ONDC may not be sustainable, JM Financial analysts said in their note: “Our channel checks suggest that most of the restaurants currently operating on ONDC are signed up through Magicpin (merchant app), which are also own platform.”

According to JM Financial’s comment, Magicpin charges 7-10% commission rates on Net Sales Value (NSV) for discovery (the restaurant bears the delivery cost or the customer prepays the delivery cost) and 20-22% for discovery plus delivery (restaurant actually bear the delivery costs).

Our conversations with restaurants connected to ONDC through Magicpin suggest that these commission rates have not changed for orders they receive through ONDC. This means that Magicpin has not yet started charging restaurants commissions that it has to pay to the commissions of the Buyer app (~3% for Paytm, according to media reports) and commissions it should share with ONDC (which currently charges no fees, but the merchant app should be 1-2% on a sustainable basis may charge),” the JM Financial note added.

Therefore, the brokerage does not believe that current commission rates are grossly subsidized. This means commission rates on ONDC can be as high as 10-16% for discovery itself.

Currently, Zomato earns 21-22% commissions on NSV from restaurants. However, these commissions also include advertising revenue (2-3% of NSV) and delivery commissions which in turn are used to subsidize delivery costs for customers (9-10% of NSV).

Adjusting this, the broker’s note added: “Zomato’s discovery commission as a % of NSV comes in at just 9-10%, which is broadly comparable to current merchant app commissions on ONDC.”

Therefore, the analysts believe that rebates/subsidies funded by ONDC and buyer/seller apps are unlikely to last in the long run due to limited willingness to take losses (unlike the vertically focused players such as Swiggy and Zomato ). This is because ONDC recently received a capital injection of approx €2 billion, which would take about 2 years. Daily orders on ONDC are currently around 20-25k versus 1.5m -1.6m each for Swiggy and Zomato.

Suppose ONDC does manage to receive 100l orders per day with a discount of approx €100, according to JM Financial, the platform will burn through all of its money in just six months.

ONDC has even started covering the burn by setting a daily stimulation threshold of €225,000 per app on the seller side (in addition to a maximum of three discounted orders per user and a maximum of €3,750 per seller per day). Delivery grants are also capped at 2,000 orders per buyer app.

In this regard, JM Financial’s report said, “We also don’t believe the buyer/seller apps have much sense in expanding their exposure in the food delivery category by burning cash amid the ongoing funding winter in the global startup. ecosystem.”

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

Therefore, it has recommended a buy on Zomato’s share price. The target price for 12 months is set at €100 per share.

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

Kotak Institutional Equities pegs Zomato’s variable delivery costs at Rs 75/order for FY2023. This includes Rs57 in delivery charges and Rs18 in other expenses. Over time, Zomato has significantly reduced incentives/discounts, so a significant portion of other expenses are customer and restaurant reconciliation expenses (costs of canceled orders, refunds due to quality issues, call center costs, etc.)

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

Zomato has yet to release its fourth quarter results for FY23.

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

Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms, and not of Mint. We recommend that investors consult certified experts before making investment decisions.