zomato stock: Zomato stock nears record low, but analysts see up to 80% returns ahead

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Zomato’s weaker-than-expected December quarter results led brokerages to cut their price targets on the stock, sending its shares to near all-time low levels. But given where the stock is right now, analysts believe the scrip could be a ‘buy’ at these price levels.

Analysts said for Zomato the path towards profitability appears to have become longer, but strong execution in core business, efforts to drive positive contribution margins should also accelerate. They have price targets as high as Rs 155 on the stock, which suggest up to 81 per cent upside potential over Friday’s low of Rs 85.85.

Investments in quick grocery commerce opens up another large opportunity though requires a sizable investment in the near-term, they said.

Credit Suisse said the numbers were tad below its expectations, even as adjusted Ebitda loss was in line with its estimates. Gross order value (GOV) rising at 1.7 per cent sequentially marked a slowdown, it said, while lowering its price multiple for the stock to 2 times EV/GOV, given the recent sharp correction.

The foreign brokerage finds the stock Rs 120 worthy as it retained its ‘buy’ call on the stock.

Kotak Institutional Equities finds the stock Rs 135 worthy. It noted that Zomato’s revenue growth of 82 per cent was strong, led by food delivery GOV growth of 85 per cent YoY.

“Lower customer delivery charge impacted GOV growth which increased 2 per cent QoQ. Zomato is well positioned to grow in the under-penetrated food delivery segment, though incremental investments in grocery business will prolong runway to profitability. We increase our WACC assumption, retain BUY and revise fair value to Rs135 from Rs170 earlier.

The company had on Thursday reported a consolidated net loss at Rs 67.2 crore for December quarter, narrowing it from Rs 352.6 crore reported in the same quarter last year. Revenue from operations came in at Rs 1,112 crore, up 82.47 per cent against Rs 609.4 crore in the year-ago quarter.

The number of orders grew 93 per cent YoY and 5 per cent QoQ. Average order value (AOV, which includes customer delivery charges) shrunk 3 per cent QoQ, mostly on account of a reduction in customer delivery charges. Goyal also answered the often asked profitability question, indicating the company was very close to achieving Ebitda break-even.

“We re-distributed our growth investments more in favour of discounts on customer delivery charges vis-à-vis food coupons. Why? Because we are seeing a higher return on investment with discounted delivery charges compared to coupons. As a result, discounts per order were reduced by Rs 5 per order in the last quarter as compared to Q2FY22,” said Deepinder Goyal, CEO of Zomato.

JM Financial said the company’s investments and the IPL tournament starting in April could help it regain strong growth momentum.

Zomato reported nearly 840 bps sequential decline in Ebitda loss percent on the back of operating leverage that offset subdued contribution margin.

“We expect these margin trends to continue in the near term. Zomato indicated that it is likely to increase its stake in Blinkit (erstwhile Grofers) following the latter’s 100 per cent transition to the quick commerce category. We remain optimistic on such hyper-local ecosystem investments (beyond core food delivery) as they could lead to bundled offerings that would not only help it improve customer engagement, retention and ordering frequency but also drive operational synergies,” the brokerage said. This brokerage has a target of Rs 155 on the stock. The stock fell 9.15 per cent to Rs 94.50 on BSE.

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