Zomato has been on shaky ground this year so far. The stock is down 58% year-to-date (YTD) while from its IPO issue price of ₹76, the stock is down 24%.
In the last few months, several brokerages including Jefferies and Kotak Institutional Equities have expressed their positive views on the stock.
While Jefferies said Zomato is a great opportunity for long-term investors, Kotak upgraded the stock to 'buy' from an earlier 'add' rating.
As MintGenie reported earlier, Jefferies has given a target price of ₹100 for Zomato. The stock is the brokerage's 'high conviction buy'.
Kotak raised the target price for Zomato to ₹79 from ₹77 earlier.
Now, brokerage firm Emkay Global Financial Services has initiated coverage on Zomato with a 'buy' rating and a target price of ₹90.
The brokerage firm is bullish on Zomato because of the growth prospects of India's online food delivery (OFD) market. Since Zomato is a major player in the OFD segment, it looks poised for growth.
"The food delivery services business offers tremendous growth opportunities and profitability is expected to improve steadily with scale. India’s OFD market may grow nearly 7 times over the next decade, led by an increase in: (1) per capita income, (2) online penetration/availability, (3) eating out habit or behaviour, and (4) women labour force participation," Emkay said.
Emkay said Zomato’s path to profitability and future value creation and, therefore, the investment case primarily rest on the continuation of the duopoly market structure, supported by inherent network effects, with Zomato maintaining nearly 50% market share.
Emkay believes Zomato’s high market share (and losses so far) in the OFD market leaves little to be exploited by competition.
"We believe Zomato’s nearly 50% market share in the rapidly expanding OFD market is a moat; expansion into adjacencies will further expand the total addressable market (TAM) and potentially drive more efficiency gains," said Emkay.
Emkay believes Zomato’s strong market position, brand recall, huge growth tailwinds considering the under-penetrated food delivery market, and anticipated turnaround in unit economics and profitability will lead to a 30% CAGR in India’s food delivery revenue and positive EBITDA contribution (nearly 27% swing in the segment’s margins) over the next four years.
Emkay values Zomato’s business (ex-Blinkit) at ₹68,600 crore on a DCF (discounted cash flow) methodology.
"Our DCF valuation is based on the following assumptions: (a) a nearly 37% revenue CAGR over FY22-25E and growth rate moderating to about 13% over FY26E-45E, (b) 12.5% WACC, and (c) 5% terminal growth rate after FY45E," said Emkay.
"We have added value of the stake in Shiprocket, magicpin, Curefit, and cash at book value. We have modelled nearly $400mn investments in Blinkit over FY23-26E; and there is no value accretion from these investments, considering uncertain timelines on unit economics turnaround and high competitive intensity," the brokerage firm added.
Emkay said it awaits clarity on the path to profitability in Blinkit business and competitive intensity to settle (preferably improvement in the industry’s structure) before turning more constructive.
Increased competitive intensity, regulatory changes, and a sharp fall in average order value (AOV) leading to slower improvement in unit economics, and poor capital allocation are the key risks that may upset Zomato's growth, said Emkay.
Last month, another brokerage firm Dalal & Broacha Stock Broking also highlighted Zomato's large market size and assigned a buy call on the stock with a target price of ₹79.
“We believe the addressable market size of Zomato is huge and they have just scratched the surface. Zomato has switched its focus on profitability and we expect the discounts to reduce. The AOV (average order value) has stabilized while the number of orders continues to grow,” said Dalal & Broacha.
The brokerage firm believes there is a huge scope to increase the order frequency along with the customer base while increasing the customer delivery charges.
Dalal & Broacha underscored that the Blinkit acquisition will grow its total addressable market and it expects them to turn profitable sooner than the street’s expectations.
According to a MintGenie poll, an average of 21 analysts have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.
