Zomato shares at Rs 100? Brokerages suggest up to 90% potential upside in the stock

Brokerage firms are positive on shares of Zomato, which has been struggling since the end of the year 2021 after the initial euphoria over the loss-making and cash-burning new-age internet companies fizzled out and the central bank pumped out the easy money from the economy.

Zomato is among the stocks, which are constantly trolled for the 'adjusted' EBITDA metrics but the brokerage firms have a target price of Rs 100, suggesting an upside potential of 90 per cent in the food delivery player. However, they have trimmed their estimates for the company.

Global brokerage firm Jefferies expects a 25 per cent CAGR in delivery revenue over FY22-26E. Unit economics to steadily improve with scale as Zomato unlocks cost efficiencies and as customer willingness to pay for convenience increases, it said.

"We value Zomato's delivery business at an exit multiple of 1.5x FY25E GM and quick commerce at 0.5x FY25E GMV, to arrive at a price target of Rs 100," it added in their base case scenario.
 

Interestingly, in their bull case scenario, Jefferies expects a 30 per cent CAGR in delivery revenue over FY22-26E. It values Zomato's delivery business at an exit multiple of 2.2x FY25E GM and quick commerce at 1x FY25E GMV, to arrive at a price target of Rs 150, suggesting an upside of 185 per cent from the current levels.

Shares of Zomato have been hovering in the range of Rs 52-55 for quite some time. The scrip was trading about a per cent lower at Rs 53.5 at 10.45 am on Wednesday, but closed at Rs 53.93 on Tuesday.
 

Zomato is a play on the growing food services industry in India as well as the increasing adoption of digital commerce. With only about 20 million monthly transacting users currently, Zomato has a long runway for customer acquisition and revenue growth, albeit this may come at the cost of near-term profitability, said Jefferies' report.

 

More than 85 per cent of ESOP cost is due to a large one-time grant to the founder CEO ahead of IPO and should run off. New grants are declining sharply and Zomato is no longer a startup that needs to overly rely on ESOPs. The existing pool seems sufficient for several years. Any further ESOPs need over 75 per cent shareholder approval and investors have a strong say, it added.

Shares of Zomato were listed at the bourses in July 2021, when the company raised Rs 9,375 crore from its initial stake sale by offering shares at Rs 76 apiece. The stock made a record peak at Rs 161.60 in late November 2021. The stock currently is trading about 67 per cent below its all-time peak and 30 per cent below its issue price.
 

Recent channel checks suggest sequential food delivery GOV growth is likely to remain muted for the third consecutive time in the March quarter. Key factors affecting growth include continued inflationary pressures, a growing share of dining-out and focus on profitability improvement, to support growth investments in Blinkit and Hyperpure, said JM Financial.

 

In fact, the relaunch of the ‘Gold’ loyalty membership and closure of operations in 225 cities suggests the company sees high long-term value creation potential by mining high and frequent quality customers, rather than investing in expanding the long tail of customers ordering infrequently, it said.

Recent developments suggest improvement in restaurant take-rates and decline in delivery cost could be much better than earlier anticipated, leading to accelerated profitability. Therefore, while we now forecast Zomato’s food delivery segment to grow at a CAGR of 21 per cent over FY23-27, JM Financial added a target price of Rs 100 on the stock.


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Business Today)

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