Axis Capital Initiates Zomato Coverage With ‘Buy’ Rating

Zomato Block Deal: Antfin Singapore To Offload Shares Worth $408 Mn

SUMMARY

The brokerage has also set a price target of INR 254 on the stock, which implies an upside of almost 36% to its last close

Despite muted growth in Zomato’s food delivery vertical, Axis expects its share in this market to grow to 54% from the current 50%, resulting in the vertical’s GOV witnessing a CAGR of 16% by FY30

On the quick commerce front, Axis believes that Blinkit’s GOV will see a CAGR of 38% in the FY24-FY30 period, touching $10.5 Bn

Brokerage firm Axis Capital has initiated coverage on food tech major Zomato with a ‘buy’ rating, noting that the company provides a “compelling investment opportunity” to gain exposure to the fast-growing ecommerce market in the country.

The brokerage has also set a price target (PT) of INR 254 on the stock, which implies an upside of almost 36% to its last close on Thursday (May 23).

The price also implies an enterprise value-to-sales (EV/sales) of 8.3X by June 2026. Axis said that though the multiple is not cheap, it is appropriate given Zomato’s growth runway, execution, and scarcity premium as it is currently the only listed player with exposure to the broader ecommerce segment in India.

We must note that Zomato posted its fourth straight profitable quarter with a net profit of INR 175 Cr in Q4 FY24, largely helped by the sharp growth in its quick commerce business Blinkit.

Blinkit turned adjusted EBITDA positive in the month of March 2024. Its gross order value (GOV) for Q4 saw a 97% year-on-year (YoY) and 14% quarter-on-quarter (QoQ) growth to INR 4,027 Cr.

On the other hand, Zomato’s food delivery business GOV fell on a QoQ basis to INR 8,439 Cr in the quarter.

Despite the muted growth in the food delivery vertical, Axis expects Zomato’s share in this market to grow to 54% from the current 50%, resulting in the vertical’s GOV witnessing a CAGR of 16% by FY30.

The brokerage noted that the commission Zomato charges from restaurants and brands is unlikely to increase meaningfully from here on, given the likely push-back by the latter. However, Axis believes that Zomato could increase the platform fees it charges to the users and ad revenue from restaurants and brands, which would support the company’s growth and profitability.

Moreover, the food delivery segment still is a large untapped opportunity, the brokerage said.

On the quick commerce front, Axis believes that Blinkit’s GOV will see a CAGR of 38% in the FY24-FY30 period, touching $10.5 Bn.

The brokerage said that Blinkit’s leading position in the segment is expected to be strengthened on the back of strong execution of faster expansion, wider assortment of SKUs and categories, and synergies between Hyperpure and Blinkit, among others.

In fact, the brokerage has also bet on Zomato’s strong market leadership in both food delivery and quick commerce despite Swiggy’s head-start in both verticals.

“Comparing Zomato and Swiggy across various strategic parameters highlights that Zomato’s market leadership across both the key segments, despite Swiggy’s head-start, is a function of its strong execution,” said Axis.

Currently, of the 26 analysts covering Zomato, 22 have a ‘buy’ or higher rating on the stock with an average PT of INR 207.88.

Shares of Zomato ended today’s trading session about 0.9% higher at INR 187.15 on the BSE.