After a little over a year since its exuberant listing, Zomato has lost over half of its investor wealth. It has shed 56 percent in the last 1 year and is down 58 percent in 2022 year-to-date (YTD). In fact, it is the worst performing internet stock on a year-to-date basis followed by Paytm, down 46 percent.
However, despite the weak performance of the stock domestic brokerage house Dalal and Broacha believe 'it's time to order Zomato'. The brokerage has a 'buy' call on the stock with a target price of ₹79, which implies around a 34 percent upside in the stock.
This comes after the company management announced that Zomato is likely to turn profitable within a year, in its first annual general meeting post-listing on Tuesday.
Akshant Goyal, chief financial officer, Zomato told shareholders: “At the company level we should break even in six months to a year…without (excluding) Blinkit which will take a bit longer," Moneycontrol report said quoting Goyal.
According to the brokerage, Zomato’s Gross Order Value (GOV) has grown at a 58 percent CAGR from FY19-FY22. This is a result of 41 percent CAGR in the number of orders delivered and 12 percent CAGR in the Average Order Value (AOV) in the same period, it added.
It further noted that the growth in GOV was a result of a rise in active food delivery cities from 455 in FY21 to over 1000 cities in FY22 which will give them the first mover advantage.
"We believe that there is huge scope for penetration of the high order frequency customers (Orders > 50 per annum), which have grown from 0.9 million in FY21 to 2.3 million in FY22. These customers at present account for only 5 percent of the total unique annual transacting customers, which is over 50 million," said the brokerage.
However, the report pointed out that the contribution margin saw a decline in FY22 to 1.7 percent from 5.2 percent in FY21, as a result of increased delivery costs and spending on customer acquisition.
The brokerage expects this to improve as Zomato focuses on increasing the customer delivery charges, improving their take rates, and reducing the discounts and they have also discontinued its loyalty program.
"We believe that the food delivery business has huge upside as Zomato finds acceptance in more number of cities. With increasing acceptance and reduced competition, we expect margins to improve. At the latest EBITDA Level, the food delivery business has already broken even," highlighted the brokerage.
Blinkit Acquisition
This, as per the brokerage, is another positive for the firm. The quick commerce business is a natural extension of the food delivery business which will increase their Total Addressable Market (TAM), it said.
This business is a recent addition to the portfolio of Zomato and the synergy will benefit in improved utilization of the delivery fleet and reduce their delivery cost, it added.
This business is still evolving and currently losing money, however, the management has guided for improved profitability going ahead, noted the brokerage.
Valuation and Outlook
The brokerage believes the addressable market size of Zomato is huge and they have just scratched the surface. Zomato has switched its focus on profitability and it expects the discounts to reduce.
"The AOV has stabilized while the number of orders continues to grow. There is a huge scope to increase the order frequency along with the customer base while increasing the customer delivery charges. The Blinkit acquisition will grow its total addressable market and we expect them to turn profitable sooner than the street’s expectations," explained the brokerage.
In the June quarter, the firm reported a narrowing of consolidated net loss at ₹186 crore for the June quarter compared with ₹359.70 crore in the March quarter and ₹360.70 crore in the year-ago quarter. Its consolidated revenue from operations surged 67.44 percent YoY to ₹1,413.90 crore from ₹844.40 crore in the corresponding quarter last year. Ebitda loss also reduced to ₹150 crore, the company said in a BSE filing.
"On the profitability front, the food delivery business hit an important milestone last quarter by getting to Adjusted Ebitda break-even. Contribution as a percentage of GOV increased to 2.8 percent in Q1FY23 compared with 1.7 percent in Q4FY22 driven by improvements on both cost and revenue side, as we had indicated in the past," Zomato said post earnings.
Other Brokerages
Like Dalal and Broacha, some other brokerages like Kotak and Jefferies have also turned bullish on the stock in the last 2 months. Kotak Institutional Equities upgraded the stock to 'buy' from an earlier 'add' rating in July-end. It also raised its target price for Zomato to ₹79 from ₹77 earlier.
Kotak 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.
In July, Jefferies also pegged Zomato as a high conviction buy. Jefferies said that it believes Zomato is a great opportunity for long-term investors. Saying 'the night is darkest before the dawn', Jefferies has a target price of ₹100 for the stock.
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, updated the value of the stock to ₹35 per share last month.
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.
