ZOMATO – RTN asia

Zomato's stock has seen a sharp run-up of over 120% from its 52-week lows in February 2023, leading to worries of overheating and over-valuation. However, analysts remain bullish on the long-term prospects of the food delivery platform. In a recent report, ICICI Securities said Zomato remains their top pick in the Indian internet space. They have a target price of Rs 160 on the stock, which implies 51% upside from current levels of Rs 109. "We believe Zomato’s medium term guidance of 4-5% adjusted EBITDA as a proportion of gross order value (GOV) should be achieved as early as Q3FY24E. Our analysis suggests that the food aggregator space is still nascent, which shows there is enough room for revenue growth in the medium term without expanding geographical footprint further," ICICI Securities said. The brokerage expects Zomato's quick commerce business to turn profitable at the adjusted EBITDA level by Q1FY25. It also sees losses in the Hyperpure B2B supplies business reducing going ahead. "Given the outlook of sharp profitability improvement in all three businesses of Zomato, we believe valuations for the stock are now pretty sensible. We therefore think there is enough room for meaningful rerating of the stock," ICICI Securities said. Kotak Institutional Equities also remains positive on Zomato with a fair value of Rs 125, implying 15% upside. "We believe Zomato’s yoy GMV growth bottomed out in 1QFY24 at 14% and should witness improving performance from 2QFY24 onward. Take rates may not see significant upward movement from hereon, though these should remain steady," Kotak said. It estimates Zomato's food delivery GMV growth to recover to 18% in FY24, 21% in 2HFY24 and remain at 18% levels over the next three years. "Although the pricing of loyalty program packages such as Swiggy Super and Zomato Gold may remain competitive in the near term, we believe that Zomato should manage to offset this impact by implementing a minor commission increase for restaurants and imposing a platform fee," Kotak said. The brokerage expects losses in Zomato's quick commerce and Hyperpure businesses to decline progressively. Some analysts have warned that Zomato's valuation appears rich after the sharp surge in the stock price. "Zomato is still loss-making and the profitability timeline keeps getting pushed back. The stock is trading at almost 90 times FY24 enterprise value to sales, which is difficult to justify," an analyst at a domestic brokerage said on condition of anonymity. However, most analysts remain positive given Zomato's market leadership, growth prospects and improving unit economics. In the latest quarterly results, Zomato reported a consolidated net loss of Rs 186 crore for the June quarter compared with a loss of Rs 359 crore in the corresponding quarter last year. Revenue from operations jumped 67% year-on-year to Rs 1,413 crore. Adjusted EBITDA loss reduced to Rs 143 crore from Rs 170 crore YoY. In a post earnings conference call, Zomato said it aims to achieve breakeven in the food delivery business in the foreseeable future. The management reiterated its projection of hitting breakeven in the quick commerce business by mid-2023. Some analysts expect Zomato to become profitable at the consolidated level by FY25. The global sell-off in technology stocks amid rising interest rates has also impacted sentiment for loss-making new age Internet companies like Zomato. However, analysts point out that Zomato has shown steady improvement in key metrics like customer additions, growth recovery and reducing cash burn. In food delivery, Zomato has nearly 16 million monthly transacting users and its GOV market share stands at 55%, highest ever. Quick commerce GOV grew 24% quarter-on-quarter in Q1FY23 and the company aims to make store economics viable in the segment. "We remain positive on the stock, with a revised fair value of Rs 125. Zomato’s profitability metrics should witness continuous improvement over the next 2-3 quarters," Kotak said. Analysts expect Zomato to see re-rating once it starts posting profits at the consolidated level. But near term upside may be limited after the sharp surge in the last six months. Investors need to ride out potential volatility and remain invested for the long run.

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