Zomato shares: What will drive stock returns in the short term? CLSA answers

Foreign brokerage CLSA said Zomato Ltd recently received a board approval for a qualified institutional placement (QIP) to raise up to $1 billion, which the management said would be used to shore up competitive position, as competitors such as Zepto and Swiggy have recently raised capital or announced capital raises.

With a closing cash balance of $1.3 billion as of Q2, if Zomato successfully raises another $1 billion, it would improve the company’s cash position significantly over competitors and reduce the risk of price-led competition, CLSA said as it expects the fund raise to drive stock returns in the short term.

"Zomato remains our top pick, primarily due to the large opportunity for quick commerce, as we highlighted in App-racadabra. We lift our target price to Rs 370 from Rs 353. Quick commerce accounts for Rs 271 of our DCF valuation of Rs 428 (vs Rs 411 earlier) for Zomato. Our PE-based valuation for Zomato is Rs 312 (vs Rs 294 earlier)," CLSA said.

The foreign brokerage said Zomato reported better Q2 revenue and Ebitda but its PAT was impacted by taxes and depreciation. Blinkit, it said, maintained contribution margins despite accelerating stores. Food delivery showed slower but stable growth, going-out looks set for rapid growth, it said.

CLSA said Zomato reported Q2FY25 results, largely above its own estimates and the consensus. Additionally, Blinkit saw stable profitability despite a rapid acceleration in dark stores (152 stores added – highest ever). GOV grew 25 per cent QoQ and 122 per cent YoY, while revenue increased 129 per cent YoY, it said.

"Food delivery also recorded a robust 21 per cent YoY GOV growth, albeit slower than recent quarters, with MTCs rising 13 per cent YoY. We cut FY25-27 earnings estimates by 21-54 per cent to reflect higher taxation, depreciation and store add costs in Blinkit. We roll-forward to Sep 26CL valuation and raise our target price by 5 per cent to Rs 370," CLSA said.