Brokerage firms believe shares of Zomato are poised for clocking healthy gains in the long term due to the prospects of healthy growth of the food delivery segment, the company's leadership position in this space and the stock's attractive valuation.
Meanwhile, the company is in news for less-palatable reasons at the moment.
The delivery executive of Zomato-owned Blinkit continue their strike after Zomato implemented modifications to the remuneration arrangement for its workers.
However, at first glance, it appears that the ongoing strike of Zomato-owned Blinkit's delivery executives has no significant impact on the Zomato stock's performance; the shares of the company ended in the green (up 0.15 percent) on BSE on April 17 in a weak market.
Blinkit is permanently shutting some of its dark stores in Delhi and Gurugram as its delivery executives remain relentless in their demand against the recent changes made to delivery incentive structures in the region.
(Dark stores are places where quick-commerce platforms store and package their products for delivery.)
As Mint reported, under the updated structure, delivery personnel will receive no less than ₹15 for each delivery within a 1 km radius, compared to the prior rate of ₹25. In addition, if the distance travelled for a delivery exceeds 1 km, the workers will be compensated based on the distance travelled, with a rate ranging from ₹10 to ₹14 per km.
In 2022, the board of Zomato approved the acquisition of Blinkit for ₹4,447 crore in an all-stock deal.
So far, brokerage firms do not appear perturbed about the strike.
Brokerage firm ICICI Securities has maintained a buy call on the stock with a target price of ₹65. It said strikes and agitations are unavoidable in the sector given the large exposure to an urban blue-collared workforce.
"We note Swiggy had also faced pushback (in Chennai) last September when they revised their incentive structures. However, given that the strike (at Blinkit) is happening in the national capital and has already garnered political attention, we think the company should try to resolve the issue at the earliest," said ICICI Securities.
The brokerage firm said due to sustained improvement in the underlying operating metrics, it maintains a buy call on Zomato with a DCF-based target price of ₹65.
"We acknowledge that further slowdown in growth poses a risk to our FY24E/FY25E estimates, but we think, at the current market price, the risk-reward is still skewed to the upside," the brokerage firm said.
Shares of Zomato have been highly volatile in the past. It hit its all-time high of ₹169.1 on November 16, 2021. As of April 17, 2023, the stock is down 68 percent from that level.
Brokerage firm Motilal Oswal Financial Services has initiated coverage on the stock with a 'buy' call, pegging the target price of ₹70, implying a 30 percent upside potential.
Motilal is positive about the stock since the food delivery industry is expected to grow rapidly and Zomato is one of the strongest players in the industry. However, it underscored that the acquisition of Blinkit is an additional risk and high attrition at senior management level remains a concern.
The brokerage firm expects India’s food delivery market to clock a rapid 19 percent CAGR over FY23-25 aided by growth in the number of transacting users and order frequency. The brokerage firm believes this should lead to a higher share of online food ordering (24 percent by FY25E from 13 percent in FY21).
"The food delivery industry in India is all set to grow rapidly in the medium term driven by intensifying internet penetration, rising consumption and growth in urbanisation. Zomato is a dominant player in the industry and we forecast the company to report a 29 percent revenue CAGR over FY23-25," said Motilal Oswal.
As the food delivery market is now a duopoly with Zomato and Swiggy having a market share of 55 percent and 45 percent, respectively, after Amazon's exit, Motilal Oswal expects Zomato to gain from the relatively early stage of the food delivery ecosystem in India.
"We expect Zomato to gain from the relatively early stage of the food delivery ecosystem in India, as increased formalisation along with a growing share of platform-led delivery (currently at 7 percent of overall food consumption) should help boost its food delivery GOV (gross order value) to ₹38,400 crore in FY25 from ₹21,300 crore in FY22," said Motilal Oswal.
But the brokerage firm sees the limited distinction between Zomato and Swiggy’s offerings – both having food delivery, dine-in and quick commerce – as a concern.
"A split market without a clear leader would hit margins due to the absence of efficiency gains from order bunching. We see a contribution margin of 5.6 percent of GOV in FY25E for Zomato versus its medium-term target of 8 percent," said Motilal Oswal.
Nevertheless, the brokerage firm believes strong delivery across verticals will drive Zomato's revenue growth.
"We expect Zomato to report a strong 29 percent revenue CAGR over FY23–25 fueled by: (a) higher penetration, (b) a higher proportion of transacting users, and (c) increased ordering frequency," Motilal said.
The brokerage firm believes the company's food delivery AOV (average order value)will remain flat in FY23E and increase to ₹409 by FY25.
"Higher penetration and usage of Zomato should drive 13 percent CAGR in MTU (monthly transacting users) over FY23-25, resulting in a 23 percent CAGR for the vertical during FY23-25 despite high-teens growth in FY24E amid near-term weakness," said Motilal Oswal.
"Revenue from Hyperpure (36 percent CAGR between FY23-25E) and Blinkit (27 percent CAGR between FY23-25E, adjusted for full FY23) is also likely to remain strong for the next few years as the company expands its operations," the brokerage firm said.
The brokerage firm expects Zomato to turn profitable over FY25, with its food business recording EBITDA breakeven in Q1FY23.
It expects gross margin to improve to 33.5 percent in FY25 from 5.3 percent in FY22 as the employee cost and other expenses as a percentage of sales decrease.
According to a MintGenie poll, an average of 25 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.
