India's Zomato reported a smaller-than-expected rise in profit for the second quarter on Tuesday as margins took a hit from investments on growing "dark stores" used to fulfill online orders on its Blinkit quick commerce platform.
Its consolidated net profit rose nearly five-fold to 1.76 billion rupees ($20.94 million) for the quarter ended Sept. 30, but fell short of analysts' estimates of 2.70 billion rupees, per data compiled by LSEG.
The company approved a fundraise of up to 85 billion rupees via a qualified institutional placement, to boost its cash balance after the recent acquisition of the movie and events ticketing businesses of digital payments firm Paytm.
Competition in India's online food and grocery delivery sector is heating up, with companies looking to raise funds to expand operations and gain market share.
Zomato's main rival Swiggy offered shares worth $448 million in its initial public offering, while Zepto raised $340 million in August, and is set to list its shares next year, according to media reports.
To combat rising competition, Zomato added 152 new "dark stores" - or distribution centres - during the quarter, the most it has ever added in any quarter, taking the total count to 791 stores.
However, the contribution margin - or the revenue generated from each additional order as a percentage of the gross order value - for Blinkit fell to 3.8% from 4% in the previous quarter.
"Since new stores and warehouses take a few months to ramp-up, they end up being margin dilutive in the short term," Zomato CFO Akshant Goyal said.
Rapid expansion will not hurt the company as they are at the break-even point and the investments will be beneficial in the long term, Karan Taurani, analyst at Elara Capital said.
Zomato's revenue rose nearly 69% to about 48 billion rupees, slightly ahead of analysts' estimates of 47.30 billion rupees.
