scorecardresearchAfter Jefferies, Kotak turns bullish on Zomato; sees over 70% upside

After Jefferies, Kotak turns bullish on Zomato; sees over 70% upside

Updated: 29 Jul 2022, 01:14 PM IST
TL;DR.

Kotak Institutional Equities upgraded the stock to 'buy' from an earlier 'add' rating. The brokerage also raised its target price for Zomato to 79 from 77 earlier, indicating a potential upside of 73 percent.

Kotak Institutional Equities upgraded the stock to 'buy' from an earlier 'add' rating. The brokerage also raised its target price for Zomato to  <span class='webrupee'>₹</span>79 from  <span class='webrupee'>₹</span>77 earlier, indicating a potential upside of 73 percent.

Kotak Institutional Equities upgraded the stock to 'buy' from an earlier 'add' rating. The brokerage also raised its target price for Zomato to 79 from 77 earlier, indicating a potential upside of 73 percent.

Soon after Jefferies retained its positive view on Zomato, another brokerage Kotak Institutional Equities also upgraded the stock to 'buy' from an earlier 'add' rating. The brokerage also raised its target price for Zomato to 79 from 77 earlier, indicating a potential upside of 73 percent.

Kotak believes that the recent 18 percent decline in the stock post the expiry of lock-in of pre-IPO investors was unwarranted, adding that the and CMP (current market price) is baking in fairly pessimistic growth assumptions for the food delivery business

It further stated that the fair value of 79 already bakes in $400 million of cash investment in Blinkit but nil value accretion. The acquisition of Blinkit as a competitor of Swiggy's Instamrt has not been taken well by many analysts as they believe it was done at an expensive valuation.

The brokerage explained that the current market price of 44 implies that the stock is pricing in a cumulative cash burn of $1.6 billion in food delivery, sharply lower contribution margins of core food delivery business, and nil value accretion from the existing minority investments as well as Blinkit.

Put together, this is a fairly bearish scenario and presents a buying opportunity, said Kotak.

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Zomato stock price trend

“Zomato will need to make upfront investments in the quick commerce business. However, its March 2022 cash balance of $1.6 billion is sufficient in our view to fund the next few years of losses,” the brokerage noted. It projects a $525 million of losses in food delivery and quick commerce over FY23-24 implying that Zomato will still end up with a cash balance of $1.1 billion by March 2024. However, it added that it does not anticipate any near-term liquidity concerns for the firm.

Kotak also believes Zomato's food delivery business is well-poised to grow at a strong pace over the next decade led by attractive market opportunities and strong execution capability.

Kotak's analysis seems to be similar to that of Jefferies which believes Zomato is a great opportunity for long-term investors. Saying 'the night is darkest before the dawn', Jefferies had given a target price of 100 for the stock, indicating an upside of over 100 percent in the next 12 months. Zomato is the brokerage's 'high conviction buy'.

According to the brokerage, tough times have changed the focus and brought acute focus on cash flow across start-ups. "Zomato management has also accelerated its journey towards better unit economics and is now eyeing a break-even in the food delivery business in the foreseeable future. Adj Ebitda losses for 4QFY22 were less than $30 million, with food delivery losses at $10 million. We expect this to get better quarter after quarter," said Jefferies.

However, in a contrarian view, eminent finance professor and Valuation Guru Aswath Damodaran, who had valued Zomato just ahead of its initial public offering at about 41 per share, has now updated the value of the stock to 35 per share.

"The value per share has dropped from 40.79 to 35.32 per share, with much of the value change from last year is coming from macroeconomic developments, manifested in a higher cost of capital. For this value to be generated, the company will need to stop paying lip service to contribution margins and adjusted EBITDA, and work on reducing growth in its cost of goods sold," Damodaran wrote on his blog.

Incorporated in 2010, Zomato is one of the leading online food service platforms with B2C offerings such as food delivery and dining-out services where customers can search and discover restaurants, order food delivery, and book a table.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.

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First Published: 29 Jul 2022, 01:14 PM IST