Shares of Zomato Ltd witnessed a wave of upward revisions in target prices from multiple brokerages as the company achieved profitability for the first time. Nevertheless, despite this notable milestone, many brokerages opted to retain their current stock ratings. This positive shift in financial performance has garnered significant attention and confidence from investors and analysts alike.
Motilal Oswal Securities projects a 28 percent surge in the stock target to reach INR 110 per share, surpassing the current market price. JM Financial is even more optimistic, anticipating a 37 percent leap in the stock value over the next 12 months, targeting INR 115 per share. Citi has also revised its target price upward from INR 84 to INR 115, reflecting their increased confidence in the company’s potential. Similarly, Morgan Stanley has raised its target price to INR 115 from INR 85 per share, aligning with the positive sentiment surrounding the stock’s future performance.
Goldman Sachs has raised its target price for the stock to INR 100, up from the previous INR 82. Meanwhile, Jefferies India is even more optimistic, setting a target price of INR 130, a substantial increase from INR 100. Kotak anticipates the stock price to reach INR 105 within the next year, compared to its earlier target of INR 95. HSBC, on the other hand, has raised its target price by 20 percent, now valuing the stock at INR 102. These revisions in target prices indicate growing confidence in the company’s future performance and potential for growth.
On August 3, Zomato reported a net profit of INR 2 crore in the first quarter of the current financial year. The company also revealed revenues of INR 2,416 crore, which marked a significant 70.9% increase compared to the previous year. This growth was attributed to the recovery in demand, aided by cooling inflation, and the continued success of the food delivery platform’s loyalty program. The positive financial results demonstrate the company’s resilience and the effectiveness of its strategies in adapting to market conditions and retaining customer loyalty.
Read More: Zomato turns profitable in Q1 FY24, reports INR 2 Cr consolidated PAT
JM Financial’s use of the term ‘stellar’ to characterize Zomato’s earnings might be an understatement considering the enormity of the achievement. The firm’s prior confidence in the Street estimates being overly conservative proved well-founded, as the actual extent of Zomato’s earnings surpassing expectations was truly remarkable and exceeded all anticipations. The brokerage firm’s decision to retain Zomato as its top pick within its listed internet coverage reflects the company’s exceptional performance and potential for further growth.
“Baking in the results and the guidance, even with a decent margin of safety, suggests Zomato is a rare play on both growth as well as profitability. While the stock has moved up 35 percent since March-quarter results, we expect the momentum to sustain, as at CMP, the market is largely capturing value attributable to only its FD business, whereas significant value unlocking is waiting to happen in Blinkit,” JM Financial said in a note.
Jefferies acknowledges that Zomato’s journey since its IPO has been a rollercoaster ride, marked by noteworthy highs and lows. However, the company has achieved a remarkable milestone by attaining adjusted-EBITDA and consolidated PAT positivity much sooner than anticipated, surpassing their own projections. This resounding success firmly puts to rest any doubts about Zomato’s ability to generate ‘respectable’ profits, solidifying the company’s position as a robust and promising player in the market.
Moreover, the outstanding results further bolster the credibility of Zomato’s management team and showcase their strong execution capabilities. This newfound confidence in the management bodes well for Blinkit, a division that was previously underestimated or even perceived negatively by many investors. As a consequence of these favorable developments, Jefferies has substantially revised their EBITDA projections, reflecting the growing optimism surrounding Zomato’s overall performance and potential for future growth.
Zomato witnessed an 11.4 percent expansion in the gross order value (GOV) of its food delivery, reaching INR 7,318 crore. Additionally, the average monthly transacting users surged by 5.4 percent, totaling 17.5 million.
Meanwhile, Blinkit, another division of Zomato, experienced a sequential growth of about 5 percent in its GOV, amounting to INR 2,140 crore. Simultaneously, the average order value (AOV) for Blinkit increased to INR 582, marking an impressive 11.5 percent rise compared to the previous quarter. These figures demonstrate the company’s ongoing efforts to enhance its business and further solidify its position in the market.
“We remain positive and expect long-duration 15 percent GOV (Gross Order Value) growth in food delivery, though we see significant upside from the quick commerce business (Blinkit), which could be as big as the FD business ahead with commensurate unit economics,” HSBC said in its latest note.
Nomura Research, Dolat, and Macquarie Research have revised their target prices downward. Nomura now projects a target price of INR 60, a significant 37 percent reduction from its earlier target of INR 87. Dolat has also decreased its target price to INR 65, reflecting a 25 percent decline. Meanwhile, Macquarie has maintained its underperformance rating and retained the target price at INR 55 per share, aligning it with the current market price. These adjustments in target prices reflect the varying outlooks of the respective brokerages on the stock’s future performance.
Zomato’s outlook is brimming with optimism as the company foresees a remarkable growth trajectory for its adjusted revenue, targeting a rate of +40 percent over the next couple of years. This expected growth is set to fuel the continued improvement of contribution margin (CM) and adjusted EBITDA margin, showcasing the company’s commitment to sustained progress and financial success.
According to Nomura’s projections, Zomato’s core food delivery business is expected to achieve a Compound Annual Growth Rate (CAGR) of approximately 20 percent during the FY24-25 period, with a contribution margin (CM) ranging between 7 percent to 7.5 percent. While Nomura acknowledges that Zomato is progressing well towards achieving its EBITDA margin target of 4-5 percent (as a percentage of Gross Order Value) earlier than anticipated, the brokerage remains skeptical about the company’s ability to maintain a double-digit CM in the face of sustained high growth in the long term.
“Transacting user growth momentum in both food delivery (+0.9mn QoQ in a seasonally strong quarter) and quick commerce (flat) was below estimates. We note lack of clarity from the management on the bottom-up growth drivers for the core food delivery business. Further, if a bulk of the growth guidance is driven by Hyperpure, Going Out, or Blinkit, this would unlikely be value-accretive,” said Macquarie in its latest report.
