Shares of Zomato extended losses for the second straight session on Tuesday, declining 18 percent in 2 sessions as the one-year lock-in period for promoters, employees, and others end. The lock-in period for the stock usually ends after a year of listing. The stock of Zomato was listed on BSE and NSE on July, 23.
Just in today's deals, the firm shed as much as 8 percent to hit its all-time low of ₹43.75 in intra-day deals.
While most analysts are bearish on the food delivery app stock, global brokerage house Jefferies believes Zomato is a great opportunity for long-term investors. Saying 'the night is darkest before the dawn', Jefferies has 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'.
"Worries of Fed tightening & investor focus on cash flow have been weighing on the Internet names, including food tech, globally. From an exuberance at the time of listing last year, Zomato is now unloved, having underperformed peers YTD. Blinkit acquisition elongates the path to profitability and despite management guidance on break-even in food delivery, investors are not giving many benefits of doubt. We think this makes for a great case for long-term investors to BUY," the brokerage explained its positive view.
Despite an exuberant listing last year, Zomato has underperformed peers on a year-to-date basis. It, in fact, is the worst performing internet stock down by 70 percent on a year-to-date basis.
It further noted that Zomato is a play on the growing food services industry in India as well as the increasing adoption of digital commerce. With only 15 million monthly transacting users currently, Zomato has a long run-way for customer acquisition and revenue growth, albeit this may come at the cost of near-term profitability, Jefferies said.
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.
It also expects tight liquidity conditions to also push its competitor Swiggy to focus on profitability as it also builds businesses beyond the core (particularly its quick commerce offering under Swiggy Instamart). With the worst of the competition behind, the brokerage hopes that the industry profit pool should rise as the sector is already consolidated.
Another positive, as per Jefferies is that unlike in the past when Zomato intended to invest across multiple businesses, with some strategic (eyeing an eventual merger) and others as a financial investment, the company now intends to conserve cash.
"The only exception to management's conservative stance is its decision to buy Blinkit, which may be driven by FOMO or protect its food delivery turf, as highlighted post-acquisition. Time horizon probably longer for the management as against investors as this business will likely be cash guzzler in the medium term," noted the brokerage.
Zomato has sharply underperformed peers in the last one month also on account of the Blinkit acquisition announcement. It has lost 17 percent in July so far and 28 percent in June.
The brokerage also noted that Blinkit pivoted fully to a quick commerce model in Jan-22 vs. a next-day grocery delivery model earlier. In the last five months, Blinkit has seen an over 50 percent increase in monthly orders. At 7.9 million orders in May, Blinkit's throughput was 16 percent of Zomato's food delivery business, informed Jefferies. It added that Blinkit's monthly EBITDA loss has also reduced sharply (-47 percent) from over ₹200 crore in Jan-22 to ₹110 crore in May-22.
Zomato itself has guided for $400 million of investment over the next two years. This remains a medium-term concern for investors as this would weigh on company profitability, added Jefferies.
Let's take a look at the Upside catalysts for the stock, as per Jefferies.
• Strong macro and up-tick in discretionary demand
• Rapid adoption of digital commerce which drives
user acquisition for platforms such as Zomato
• Better-than-expected trends in AOVs, unit economics
• Successful ramp-up across adjacent businesses such as grocery etc.
Here are the Downside catalysts for Zomato, as per the brokerage:
• Increase in competition from new entrants, Swiggy, direct ordering
• Slower-than-expected market growth
• Adverse regulations for platform businesses
• Uncertainty on unit economics; challenges in expanding beyond the core
Jefferies expects a strong growth momentum in MTUs (monthly transactional users) and GOV (gross order value) for Zomato over the medium to long term.
"We build-in 25 percent MTU CAGR over FY22-26 and a modest 4 percent growth in frequency to drive a 31 percent annual growth in GOV," it forecasts.
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.
