Zomato shares: ONDC no threat for now, says Motilal Oswal. Here's price differential in Mumbai, Bengaluru

Shares of food aggregator Zomato have been under pressure of late amid fears that the government-provided Open Network Digital Commerce (ONDC) may emerge as a strong competitor to the food delivery services platforms. But if one goes by Motilal Oswal Securities, ONDC does not pose an immediate threat, at least at the current scale. The brokerage though sees ONDC as a potential threat.

"Over the last few days, media reports have been drawing attention to the increasing number of orders placed through ONDC and how this could potentially benefit restaurants due to the difference in take rates compared to Zomato-Swiggy duopoly. We do not perceive direct ordering as a major concern for the industry," Motilal Oswal said.

Motilal Oswal said it sees ONDC as potential threat to Zomato, only if it meaningfully scales up across categories, allowing it to achieve greater efficiency compared to the walled gardens.

"At its current scale, we do not have enough evidence to alter our base case for Zomato. We reiterate our 'Buy' rating on the stock and a target price of Rs 70, implying a 15 per cent potential upside," the brokerage said.

Motilal Oswal said it do not envisage a large scale impact on Zomato until ONDC significantly scales up, but it may impede the expansion of take rates in the near term.

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If Zomato’s take rate rationalisation exercise is slowed down, it could potentially delay the company’s timeline for achieving profitability, which remains a key risk at this stage, Motilal Oswal said.

"Customer grievance redressal mechanism, a key component in the food delivery industry, where timely resolution is of paramount importance is non-existent in ONDC (only an email-id to log complaints)

Disaggregated platforms (separate for sellers, buyers, and delivery) are also likely to add to issues in returns and quality of service, which remain unresolved. A walled garden (Zomato) on the other hand controls the experience," Motilal Oswal Securities.

Also, Motilal Oswal Securities said, a majority of restaurants on ONDC are currently quick commerce/fast food, and they tend to follow a platform-agnostic approach. They represent

a small portion of the overall food market, it noted.

ONDC a threat

Motilal Oswal said ONDC the risk posed by ONDC will only become significant once it scales up in multiple categories (food, ecommerce, grocery), which would give it the scale to override the delivery scale of the existing players.

The current 10,000 deliveries a day (40 per cent in Bangalore) across categories does not present enough scale to absorb the delivery rider cost for the platform.

"For comparison, Zomato currently delivers 18 lakh orders per day on standalone basis. However, the industry-wide figure across multiple categories (relevant for ONDC) would be several times greater than this," Motilal Oswal said.

The delivery on ONDC apps is only free for the first order. In case of a discounted or free delivery, this cost has to be borne by the restaurant, possibly to increase competitive advantage against incumbent duopoly, which is not sustainable.

"Also, after the first free delivery, in some cases delivery charges is higher than Zomato/Swiggy. Moreover, the difference in pricing is unlikely to be sufficient to override the wider selection of food options (early mover advantage) and a well-oiled delivery machine of incumbents. Nevertheless, if ONDC continues to scale up over time, this could become a significant risk, as it would enable greater delivery efficiency making the system sustainable," Motial Owsal said.

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