Brokerages Give Zomato A Thumbs Up Post Strong Q3 Show

Brokerage firms, including Jefferies, Nuvama and Kotak, have raised the price target (PT) for Zomato stock, a day after the foodtech major reported a consolidated profit after tax (PAT) of INR 138 Cr in the December quarter (Q3) of the financial year 2023-24 (FY24), helped by a sharp growth in its quick commerce business.

A large majority of brokerage firms have marked “buy” rating on the stock. With this, securities expect the stocks to provide a total return of 15% or more within a year.

While investment banking firm JM Financial retained PT of the stock at INR 200, Jefferies upped its forecast to INR 205 from its previous INR 190. 

Similarly, Nuvama institutional equities bumped up its previous PT forecast of INR 140 to INR 180. On the other hand, Kotak upped the number to INR 190 from INR 160. 

Shares of Zomato ended at INR 149.45 on Friday (February 9), up 3.78%, from previous day’s close.  

“Zomato continues to be one of our preferred picks in the listed Internet space as we believe it is well positioned to benefit from robust industry tailwinds for the hyperlocal delivery businesses. Its balance sheet also remains strong with net cash of INR 120 Bn as of December 2023,” JM Financials said.

The brokerage’s response is a consequence of the foodtech major posting its third consecutive profitable quarter. Its net profit rose 283% from INR 36 Cr in Q2 FY24. The startup made INR 3,288 Cr from its operations during the quarter, a 69% increase from INR 1,948 Cr in the corresponding quarter of last year.

The company’s rapid growth has been fuelled by its quick commerce vertical Blinkit. Owing to an increased festive demand, its revenue surged to INR 644 Cr, more than double from the INR 301 Cr it made in Q3 FY23. “Blinkit is the market leader in the fast-growing quick-commerce space and is set to see sharp margin improvements,” Jefferies said. 

Zomato said that it is on track to meet its guidance of adjusted EBITDA break-even for Blinkit on or before the June quarter of financial year 2025. JM Financial believes take-rate expansion, store operating leverage and corporate level operating leverage are key levers for near-term margin expansion to reach break-even for Blinkit.

Moreover, Kotak’s upgrade is primarily based on the company’s strong revenue growth indication for the Blinkit business. “We believe that the margins of the business can also improve in tandem with the core business,” the brokerage said. 

However, a lion share of the total operating revenue was still brought in by its food delivery vertical. While the vertical’s revenue went up by 29% YoY to INR 2,205 Cr, sequential growth didn’t meet the company’s expectations. 

Kotak said the demand environment was muted in the quarter hence food delivery GOV growth (at 6.3% QoQ) was lower than the company’s expectations. However, it noted that the growth was still higher than some of the other players in the restaurant industry space.

Nuvama believes that the growth of Zomato’s food delivery vertical would be driven by an improvement in order frequency, restaurant addition; and an increase in market share. “Based on SOTP [sum of the parts valuation], we are valuing the food delivery business at 60x Q4FY26 EBITDA deriving value of INR122/share ($ 12.1 Bn),” the brokerage said. 

Another interesting spike in the company’s business was contributed by its B2B arm Hyperpure. Its revenue doubled to INR 859 Cr from INR 421 Cr a year ago. The company is now in the process of setting up a plant for processing value-added food supplies to further scale up this vertical. 

Kotal expects that the capital expenditure that will be incurred by Zomato will not be very meaningful in the overall size of the business. Thus, payback on this investment is expected to be attractive. Zomato wants to try with one facility and may expand in the future, the brokerage further said.

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