Brokerage firm Kotak Institutional Equities has retained a 'buy' call on Zomato with a fair value (target price) of ₹82, implying a nearly 62 percent upside from the stock's March 15 closing of ₹50.76 on the BSE.
The brokerage firm underscored that Zomato Gold price has been continuously hiked by Zomato and now sits at ₹299 for three months, higher than the introductory price of ₹149 but still lower than ₹399 offered by Swiggy One (loyalty program).
"At ₹299, we reckon customer profitability is still below the average company-level profitability, which may eventually be offset by higher restaurant take rates and higher package renewal costs for Gold customers," Kotak said.
Kotak believes Zomato will eventually increase its pricing by offering higher renewal price to existing customers.
The brokerage firm added that Zomato is also negotiating for higher take rates with restaurants, which can also offset any impact of Zomato Gold.
"We currently model contribution margins (CMs) of 4.5 percent in FY24 and 4.6 percent in FY25, lower than 5.1 percent reported in 3QFY23," said Kotak.
Kotak expects Zomato to do more experiments with Blinkit to drive higher revenue per user but it should not involve any significant cash burn.
"Zomato has been experimenting with its service proposition in Blinkit to drive the optimal product value fit. Per media reports, it is evaluating the launch of local services (plumber, electrician, etc., within minutes) on its platform," Kotak said.
"Zomato has tried other services on Blinkit in the past such as offering printouts, and high AOV items such as phones; it has quickly scuttled services which didn’t work. We reckon the launch of local services is another such attempt and shouldn’t involve any significant cash burn," Kotak said.
Kotak believes revival in discretionary consumption may take two-three quarters, as high food price inflation is absorbed by consumers and non-metro demand comes back.
The brokerage underscored 4QFY23 may fail to excite as inflationary pressures, seasonally weak demand (low festival days) and a lower number of days in the quarter all play on food delivery demand.
"Our discounted cash flow (DCF) of the food delivery business bakes in FY23-30 food delivery gross merchandise value (GMV) CAGR of 19 percent. Core business EBITDA can however increase at a much faster pace given operating leverage potential in the business," Kotak said.
"Some level of experimentation in both Zomato and Blinkit businesses will continue, as Zomato attempts to increase its share of the wallet of customers," Kotak said.
According to a MintGenie poll, 25 analysts on an average have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.