Zomato up for third day, hits 52-week high as brokerages expect up to 47% upside

The stock has bounced back strongly in the current year after a weak show last year. The stock has jumped over 89 percent this year so far. It lost 57 percent of investor wealth in 2022.

Meanwhile, it has soared over 155 percent from its 52-week low of ₹44.35, hit on January 25, 2023.

In the 10 months of 2023 so far, the stock has given negative returns in just two – March (down 4.7 percent) and January (down 16 percent). The stock has gained over 10 percent in October till date, extending gains for the 7th straight month since April. It surged the most in April, up over 27 percent.

After the incredible recovery this year, domestic brokerage houses ICICI Securities as well as Kotak Institutional Equities have ‘buy’ calls on the stock. The brokerages have also raised target prices for Zomato.

ICICI has a target price of ₹160 (up from ₹120 earlier), indicating an upside of almost 47 percent. Kotak, on the other hand, has upped its target price to ₹125 (from ₹110 earlier), implying a potential upside of 15 percent.

However, currently trading at around ₹112, the stock is still around 33 percent away from its record high of ₹169, hit on November 16, 2021. After starting its downward trend in June 2022, the stock re-hit its IPO price a year later in June this year. It is now up over 47 percent from its IPO price of ₹76.

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Earnings

In the June quarter (Q1FY24), the food aggregator reported its first-ever consolidated net profit of ₹2 crore as against a net loss of ₹186 crore in the year-ago period. The revenue from operations during the quarter came in at ₹2,416 crore versus ₹1,414 crore in the year-ago period.

The company said its food delivery business posted adjusted revenue of ₹1,742 crore in the first quarter as compared to ₹1,470 crore in the year-ago period. The gross order value (GOV) for the food delivery business showed strong growth, rising by 11.4 percent QoQ to reach ₹7,318 crore in Q1, compared to ₹6,569 crore in the preceding March quarter. Furthermore, Blinkit, the grocery delivery service, also performed well, with revenue reaching ₹384 crore in Q1, a significant increase from ₹164 crore in the year-ago quarter. The GOV for Blinkit grew by 5 percent QoQ, reaching ₹2,140 crore.

Overall, the company’s EBITDA loss narrowed sharply to ₹48 crore in Q1 from ₹307 crore in the year-ago quarter.

Commenting on the Q1 performance, Zomato Chief Financial Officer Akshant Goyal said, “Realistically speaking, we were expecting to hit this milestone in the September quarter, and we were being conservative in our earlier guidance. However, some critical parts of the team across our businesses out-executed our expectations/plans, and some of our initiatives delivered better outcomes than we had expected.”

“We expect our business to remain profitable going forward, and knowing what we know today, we believe we will continue to deliver 40 percent-plus YoY topline (adjusted revenue) growth for at least the next couple of years,” Goyal said.

ICICI Securities On Zomato

The brokerage re-iterates its BUY rating on Zomato led by earnings upgrades, given improved visibility of profitability and sustained improvement in the underlying operating metrics. Zomato remains its top pick in the Indian internet space.

ICICI sees the stock trading at ₹200 (79 percent upside) in its bull case scenario and at ₹70 (37 percent downside) in its bear case scenario, implying a risk-reward skew of 2.6:1 towards the upside.

The brokerage has priced in revenue growth of 25 percent, 26 percent, and 20 percent in the food delivery business, respectively, in FY24E, FY25E and FY26E. Meanwhile, it sees an overall revenue growth of 43 percent, 34 percent and 25 percent over FY24E-26E. Also, it estimates adjusted EBITDA margins (as a % of reported revenue) of 14 percent/21 percent/23 percent in food delivery and 5 percent/12 percent/15 percent overall over FY24E-26E.

Given the outlook of sharp profitability improvement in all three businesses (food delivery, quick commerce and hyperpure) of Zomato, ICICI believes valuations for the stock are now pretty sensible.

“We therefore think there is enough room for meaningful rerating of the stock. In fact, at CMP, Zomato is looking attractively valued compared to many global and Indian peers on profit multiples,” it said.

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Kotak on Zomato

While Kotak’s new target price doesn’t see an exceptionally high upside like ICICI’s, the brokerage believes that Zomato’s profitability metrics should witness continuous improvement over the next 2-3 quarters. This will be led by operating leverage-driven margin improvement in the food delivery business and curtailment of losses in the Hyperpure and Blinkit businesses.

Compared with the ₹52 crore adjusted EBITDA posted in Q1FY24, the FY2024 exit EBITDA run rate could be sharply higher, it predicted. The brokerage has upgraded its FY24-26 adjusted EBITDA estimates by 10-22 percent and EPS by 10-30 percent. It also upgraded FY24/25/26 GMV (gross merchandise value) growth estimates to 18 percent each from 16, 17, and 16 percent, respectively earlier.

“We believe Zomato’s yoy GMV growth bottomed out in 1QFY24 at 14 percent YoY and should witness improving performance Q2FY24 onward driven by: (1) improving demand trends, particularly in nonmetro cities, (2) a favorable base, and (3) higher ordering intensity in Q3FY24, driven by the Cricket World Cup,” it explained.

It also pointed out that Zomato’s food delivery take rate expanded 92 bps yoy in Q1FY24, driven by a 200 bps expansion in the restaurant take rate, which offset the compression in delivery take rates brought about by the ‘Zomato Gold Programme’. Although the pricing of loyalty program packages such as Swiggy Super and Zomato Gold may remain competitive in the near term, Kotak believes that Zomato should manage to offset this impact by implementing a minor commission increase for restaurants and imposing a platform fee. The platform fee, currently at ₹2-3/order in metro cities, may eventually be charged to all customers.

Furthermore, it sees Zomato remaining on track to achieve EBITDA profitability in Blinkit in FY25. In its Q1FY24 earnings call, the company guided to achieve EBITDA profitability by Q1FY25. Kotak has currently modeled a modest EBITDA of ₹26.8 crore in FY2025 from Blinkit. For Hyperpure, it assumes EBITDA profits only starting FY26.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 12 Oct 2023, 01:20 PM IST