Over the last few days, media reports have been highlighting the increasing number of orders placed through ONDC (Open Network for Digital Commerce) and its potential benefits for restaurants, as it offers lower take rates compared to food-delivery majors like Zomato and Swiggy.
ONDC is a platform launched by the Government of India in 2021 to promote digital commerce in the country. The ONDC platform aims to create an open, transparent, and accessible e-commerce ecosystem that will empower small businesses and entrepreneurs by enabling them to sell their products directly to consumers without relying on intermediaries.
Investors are worried that the surge in orders on the ONDC platform might pose a threat to Zomato, as it sells food directly to consumers without the need for a third-party vendor and also offers better pricing compared to food aggregators such as Zomato.
This led to a sharp fall in Zomato shares of around 6.10% in Tuesday's intraday trade. Nevertheless, analysts do not consider direct ordering to be a significant worry for the Indian food delivery industry.
ONDC a threat only if it scales up
Domestic brokerage firm Motilal Oswal believes that the risk posed by the government-backed platform ONDC will only become significant once it scales up.
The current level of 10,000 deliveries per day across various categories, with 40% of them being in Bangalore, is deemed insufficient to cover the cost of delivery riders for the ONDC platform, said the brokerage firm.
In comparison, Zomato currently delivers 1.8 million orders per day on a standalone basis. However, taking into account the entire industry across multiple categories that ONDC operates in, the figure would be significantly larger, it added.
Meanwhile, the delivery on ONDC apps is only free for the first order. In the case of a discounted or free delivery, this cost has to be borne by the restaurant (possibly to increase competitive advantage against the incumbent duopoly) and is not sustainable.
Moreover, the difference in pricing is unlikely to be sufficient to override the wider selection of food options (early mover advantage) and a well-oiled delivery machine of incumbents, according to the brokerage.
Going forward, if ONDC continues to scale up over time, this could become a significant risk, as it would enable greater delivery efficiency, making the system sustainable, it noted.
Should you buy Zomato stock?
The food delivery business is still at a nascent stage in India, with a long runway of growth. With a dominant market share and strong growth in the food delivery business and Hyperpure, the brokerage expects Zomato to report a strong 29% CAGR over FY23–25.
While the management expects to turn profitable latest by 2QFY24, Motilal believes the company should break even in FY25.
The brokerage has valued the business using the discounted cash flow (DCF) methodology, assuming a 4% terminal growth rate and a 12.5% cost of capital. It has reiterated a 'buy' rating on the stock with a target price of ₹70 apiece, which suggests a potential upside of 13.45%.
26 analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
