Following HSBC, Goldman Sachs and Jefferies have raised their price targets (PTs) for Zomato, a leading foodtech company, due to robust growth in its food delivery and quick commerce segments.
Goldman Sachs raised its price target on Zomato from INR 130 to INR 160, indicating a 14.6% upside from the stock’s recent closing price. The global brokerage highlighted Zomato as the fastest-growing company in its global food delivery and India internet coverage.
Blinkit’s Growth Propels Zomato’s Quick Commerce Success
According to analysts at Goldman Sachs, the food delivery market has solidified around two main players, with Zomato commanding approximately 55% of the market share in the first half of 2023. Additionally, they highlighted that Blinkit has ascended to become one of the top three online grocery platforms in India based on gross order value (GOV).
The brokerage anticipates a 45% Compound Annual Growth Rate (CAGR) in Blinkit’s Gross Order Value (GOV) between the fiscal years 2024 and 2027, surpassing the industry rate of 34%.
“Given the potential TAM for online grocery is 8-10X larger than that for food delivery per our estimates, Zomato achieving positive unit economics in this segment recently could result in revenue growth remaining elevated for a multi-year period,” said the analysts at Goldman Sachs.
It’s worth mentioning that Zomato’s quick commerce subsidiary, Blinkit, achieved a positive contribution for the first time in the second quarter of fiscal year 2024. The company envisions this business attaining adjusted EBITDA breakeven by the first quarter of fiscal year 2025.
Continue Exploring: Blinkit records first positive contribution, anchoring Zomato’s quick commerce success
Addressing the competitive landscape, analysts at Goldman Sachs additionally noted that in the first half of 2023, Zomato’s trading losses were only a quarter of those incurred by its main competitor, Swiggy, led by Deepinder Goyal.
In terms of competition, Goldman Sachs analysts also mentioned that trading losses for Zomato’s primary rival, Swiggy, were four times higher than those of the Deepinder Goyal-led startup in the first half of 2023.
“…with Swiggy aiming to achieve group level profitability by CY24, we expect competitive intensity across both food delivery and quick commerce to remain benign for Zomato,” the analysts added.
Moreover, in a research note titled “The Rise of ‘Affluent India’,” Goldman Sachs identified two modern tech startups, MakeMyTrip and Zomato, as its top recommendations.
The research report indicated that approximately 4% of India’s working-age population boasts a per capita income of $10,000 (a little over INR 8 lakh), equating to approximately 60 million consumers. According to its analysis, this consumer group has demonstrated a Compound Annual Growth Rate (CAGR) of over 12% during the period from 2019 to 2023.
“If the current trajectory continues, we expect ‘Affluent India’ will grow to about 100 Mn consumers by 2027,” it said.
It identifies sectors like leisure, jewellery, out-of-home food, healthcare, and premium brands across all categories as the primary beneficiaries of the emerging ‘Affluent India.’ While various stocks are linked to these segments, Goldman Sachs suggests that Zomato could be among the major beneficiaries of this trend.
It also anticipates Zomato’s revenue to achieve a 30% Compound Annual Growth Rate (CAGR) during the fiscal years 2024 to 2027, marking the highest growth rate within its coverage of the India Internet sector.
Many brokerages are now redirecting their attention to the business expansion of Blinkit, anticipating that its growth will propel Zomato forward.
Jefferies increased its price target for Zomato from INR 165 to INR 190, indicating a 36.1% upside from the stock’s most recent closing price.
The brokerage stated that Blinkit presents a substantial opportunity in the dynamic quick commerce sector, with the potential for additional positive developments, as investors are just beginning to perceive it more favorably.
Being in the early stages of growth, Blinkit is projected to experience accelerated expansion at a 38% Compound Annual Growth Rate (CAGR) from FY24 to FY28. Jefferies also foresees significant margin improvements, with the contribution margin expected to reach 6% by FY28 and the EBITDA margin to achieve 4%.
Meanwhile, the brokerage observed that Zomato consistently achieves robust growth while enhancing profitability, validating its premium valuations.
Zomato’s shares experienced a surge of over 100% in 2023, leading to a doubling of its market capitalization, surpassing the $12 billion mark. This valuation is the highest among other listed new-age tech startups.
Despite maintaining a positive long-term outlook, HSBC Global Research anticipates Zomato to deliver subdued results in Q3 FY24, especially in its food delivery segment following a robust second quarter.
HSBC anticipates that Zomato’s financial performance for the December quarter is likely to fall below expectations, potentially exhibiting a slight decrease compared to the September quarter.
However, the brokerage expects Blinkit’s growth to have remained strong in Q3 FY24.
“We believe food value is well captured in the current stock price and further upside will largely be driven by the QC (quick commerce) business. We now also expect profitability improvement to be gradual in the near term and hence market focus will be on QC growth,” HSBC research analysts said. “After an extremely strong 2023, we expect relatively muted business and stock performance in 2024.”
All the above-mentioned brokerages have a ‘buy’ rating on Zomato.
Following a peak at a new 52-week high of INR 141.55 in intraday trading on Friday (January 12), Zomato’s shares closed today’s session approximately 1% higher at INR 139.6 on the BSE.