Online food delivery platform Zomato has been a constant disappointment for its investors who held on to the stock post listing. The stock has been on a downtrend soon after listing at a 65 percent premium. Currently, it trades around ₹70, below its issue price of ₹76.
It has massively erased investor wealth, down 50 percent in 2022 YTD and nearly 60 percent from its all-time high of ₹169, hit in November 2021. It had fallen as low as ₹50 per share in May 2022.
Despite such a poor stock price trend, recently, global brokerage house HSBC has a 'buy' call and a target price of ₹85 for the stock, indicating an upside of 21 percent.
As per the brokerage, synergies between Zomato’s Food Delivery (FD) and Instant Grocery business will be key for the company. Earlier in May, it had upgraded the stock to a ‘Buy’ rating from ‘Hold’ rating.
The brokerage said that it finds investors broadly divided on Zomato’s strategy to acquire Blinkit and some even question the merit of foraying into Grocery. However, it noted that for Zomato that building a grocery business will work as a “poison pill”.
"It would need reasonably high investment and hence cash burn and is likely to be a significant logistical challenge to execute as well, but still Zomato can’t afford not to do it. The more important question is, what would be the ideal market positioning for Zomato’s grocery business to effectively compete with Swiggy, Dunzo, Zepto, Amazon etc.," stated the brokerage.
HSBC believes that as the share of organic customers of Instamart grows, they are more likely to be target FD customers as well for Swiggy, thereby hurting Zomato’s core FD business.
Consequently, Zomato has to build its Grocery capabilities quickly and in our view has to merge the apps effectively to leverage its customer base for grocery as running the grocery business separately is unlikely to create much value, it said. It is important to note that currently, Blinkit — the grocery business and Zomato itself are offered as two separate applications.
"Being on the same app offers much needed ease of use for both FD and Grocery customers. In particular, for loyalty programs like Zomato Pro and Swiggy One, merging FD and grocery orders provides significant savings to the customer and drives stickiness and loyalty," it explained.
HSBC suggested that Zomato could either go with the quick-commerce model for grocery business with 10-15-minute delivery or with a full kitchen offering that offers delivery the next day.
“In our view, Zomato has to attempt to build its grocery business closer to the middle of this framework and leverage technology to design and manage its stores. Cross-selling to Zomato’s customer base, integrating the tech stack and building fulfillment infrastructure (as above) are top priorities for Zomato to build a successful grocery business, in our view,” it added.
Fundamentally, HSBC believes unlike many other segments in the new-tech space, food delivery is relatively mature, with a healthy duopoly structure and clear value proposition.
For the March quarter, Zomato's net loss widened to ₹360 crore as expenses nearly doubled. The company reported a net loss of ₹134 crore in the year-ago period. Consolidated revenue from operations, however, rose 75 percent to ₹1,212 crore in Q4FY22 as against ₹692 crore in Q4FY21. Total expenses during the fourth quarter rose to ₹1,701.7 crore as against ₹885 crore earlier, the company said.
For FY22, its net loss increased to ₹1,222.5 crore versus ₹816.4 crore in the previous financial year. Revenue from operations in FY22 stood at ₹4,192.4 crore as against ₹1,993.8 crore in FY21.
Commenting on the performance, Zomato Founder and CEO Deepinder Goyal said, "We think our growth trajectory is back on track, and we don't foresee 'post-COVID ramifications' affecting our growth rate anymore. Having said that, even before COVID, growth in our business has been lumpy (and not linear), so it is essential to take a long-term view of our business."
He further said Zomato is aiming for accelerated growth along with a further reduction in losses and increasing profits in some time.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
