Emkay Starts Coverage On Zomato With ‘Buy’; Sees Nearly 50% Upside In 1 Year

Emkay Research has initiated coverage on Zomato shares with a ‘buy’ rating as it views the foodtech startup’s almost 50% market share in the rapidly growing duopolistic online food delivery market as a strong competitive advantage, making it difficult for any other competitor to take on it.

Zomato’s strong market position, brand recall, expanding total addressable market (TAM) with B2B business Hyperpure and quick-commerce business Blinkit, along with anticipated turnaround in profitability, is expected to lead to a 40% revenue compound annual growth rate (CAGR) and positive net profit in the next four years, the brokerage said in its report.

Since the food delivery platform market in India has practically become a duopoly with Zomato and Swiggy broadly having equal market shares, the brokerage believes that there is very limited differentiation between both the platforms in terms of offerings, geographical footprint, and prices. 

“Both players do enjoy some competitive edge over each other in their given micro markets, but it is unlikely that either of them would emerge as a clear market leader on pan-India basis,” said Emkay Research analysts.

“We estimate Zomato’s platform to receive 6.6 Mn orders per day in FY30E compared with 1.5 Mn orders per day in FY22,” said the analysts.

Emkay Research has a price target of INR 90 on Zomato, which signifies an upside of 45% to the stock’s last close on the BSE. However, the brokerage has not factored in any value accretion from Blinkit given “uncertain timelines on unit economics turnaround” and intense competition.

“We prefer to await clarity on the path to profitability in Blinkit business,” the brokerage noted.

Emkay Research’s upbeat view on Zomato is largely backed by its bullish sentiment on the overall online food delivery market, which it expects to grow about 7X in the next decade due to growing internet and smartphone penetration across the country, increasing per capita income, rising female labour force participation, evolving habits of eating out, among others.

“We expect OFD (online food delivery) companies to capitalise on captive customers and exploit ‘adjacencies’ like hyper local delivery. We believe Zomato’s high market share (and losses so far) in the OFD market leaves little to be exploited by competition,” the analysts said.

A strong balance sheet of about $1.4 Bn in cash and anticipated improvement in cash burn from its overall operations would enable Zomato to expand into adjacencies to improve efficiencies in its delivery infrastructure and create further value, they added.

Since its Blinkit acquisition in June, Zomato has been reiterating that the quick-commerce startup’s losses are coming down every month. Recently it said that Zomato’s overall business will achieve adjusted EBITDA breakeven between the Q4 of the current fiscal year (FY23) and Q2 FY24.

Meanwhile, Zomato’s food delivery business has already achieved breakeven at an adjusted EBITDA level in Q1 FY23.

Emkay Research views Zomato’s Hyperpure and Blinkit businesses as strategic fits for the core food delivery business. The startup’s reduced guidance of $320 Mn investment at Blinkit would limit the cash burn, it said.

“Zomato could earn about $1.5 Bn in profit in FY35 with high ROCE (return on capital employed) and potentially command a market cap of $70 Bn, if one applies one-year forward P/E price-to-earnings multiple of 50X,” the brokerage added.

Zomato reported a net loss of INR 186 Cr in Q1 FY23 as against INR 360 Cr in the corresponding quarter of last year.

Last week, international brokerage Jefferies reiterated its ‘buy’ rating and INR 100 target price on Zomato. It noted that while many investors are still sceptical about the startup’s entry into the quick commerce space they are convinced about the growth potential of its food delivery business.

On Friday, shares of Zomato ended 1.63% higher at INR 62.20 on the BSE.

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