Brokerages bullish on Zomato despite widening net loss; should you buy, sell or hold?

Shares of Zomato traded higher on Thursday after the food delivery firm reported better-than-expected topline figures for the quarter ended September 30. The company on Wednesday posted 21.29 per cent quarter-on-quarter (QoQ) and 140.42 per cent year-on-year (YoY) growth in consolidated revenue at Rs 1,024.20 crore in Q2FY22.

However, Zomato's net loss widened to Rs 429.6 crore during the quarter under review mainly on account of investments in the growth of its food delivery business. Net loss stood at Rs 229.6 crore in the year-ago quarter and Rs 356.2 crore in the preceding quarter ended June 30.

The big question now is should you buy, sell or hold?

Brokerages on Dalal Street see up to 60 per cent upside in Zomato post Q2 result. ICICI Securities is of the opinion that Zomato’s September quarter revenue growth was incredibly strong and way higher than expectations.

It further added that increase in delivery cost (Rs 5 per order) and higher Employee Stock Ownership Plan (ESOP) expenses led to Rs 160 crore higher EBITDA loss against the previous quarter. “While some of these factors are outside the control of the company (example prolonged monsoons), other factors such as aggressive investments in Next 500 towns and branding should drive back-ended benefits,” ICICI Securities said in a report. It has set a target price of Rs 220 for Zomato post Q2 results.

Global brokerage firm Goldman Sachs also retained ‘Buy’ on Zomato with a target price of Rs 185. It believes that the Q2 beat was driven by strong user acquisition. It sees elevated cash burn in the near term, as the focus of the firm remains on user acquisition. Another foreign firm Jefferies has fixed the target price at Rs 170.

On the other hand, Morgan Stanley has upgraded the stock to overweight from equalweight. It has also raised the target price for Zomato to Rs 185 from Rs 140 earlier. It believes that acceleration in the core business, doubling down on investments despite losses are key triggers for the stock. Morgan Stanley also revised revenue forecasts by 14 per cent-20 per cent for FY22-24. It also expects that Zomato may break even by FY25.

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