SUMMARY
We see only a limited impact of ONDC on Zomato in the near term; the long-term impact is tough to call: Kotak Institutional Equities
The brokerage firm retained a ‘buy’ rating on Zomato with an unchanged target price of INR 82
The optimism towards Zomato from Kotak Institutional Securities comes days after Motilal Oswal expressed a similar opinion
While the government’s Open Network for Digital Commerce (ONDC) has positioned itself as a potential challenger to the Swiggy-zomato
duopoly in India’s food delivery market, experts at Kotak Institutional Equities see only a limited near-term impact of the network on the two incumbents.
“We see only a limited impact of ONDC on Zomato in the near term; the long-term impact is, for now, tough to call,” said Kotak in a report seen by Inc42.
The brokerage firm retained a ‘buy’ rating on Zomato, irrespective of the media coverage around ONDC, with an unchanged target price of INR 82.
The brokerage firm added that the cost of ordering food on ONDC seemed to be lower than on Zomato or Swiggy in some cases, adding that the reduced cost was because of ONDC-funded discounts.
It added that if the discounts were set aside, there were instances where ordering from Zomato and Swiggy would have been cheaper for customers.
“We believe the INR 50 discount will not be sustainable for very long. Unlike privately-funded aggregators, ONDC is backed by Indian financial institutions and may not have a large budget to fund discounts in the future,” said the brokerage firm, adding that the network has already started removing it for repeat customers.
Kotak added that Zomato’s large scale, cost competitiveness and reasonable margin profile might leave it unscathed from ONDC near-term, with the long-term impact being still unclear given the market’s dynamic nature.
Talking more about the costs, the brokerage firm said that while ONDC has not yet invested in customer experience to be on par with Zomato and Swiggy, it will have to do so.
“This may drive down the differential in pricing between the two platforms, the assumption being that ONDC-funded couponing fades out with time,” added Kotak.
Detailing the differences between ONDC and Zomato further, Kotak pointed out that ONDC’s third-party dependent delivery model would do well in the 60-120 minute delivery window, but would falter in the 30-45 minute timeframe.
This is down to the fact that Zomato had around 330,000 average active monthly riders in the third quarter of FY23, much higher than the likes of Shadowfax and Dunzo who are working with ONDC.
The optimism towards Zomato from Kotak Institutional Securities comes days after Motilal Oswal expressed a similar opinion towards the listed foodtech startup.
Over the last two weeks or so, food delivery on ONDC has caught on significantly, with major media outlets and influencers reporting on the price difference between the food ordered from Zomato or Swiggy and ONDC. Inc42 broke the story on May 4, diving deep into the price differences.
Inc42 also talked with magicpin and its ONDC ambitions, as a fence-sitter looking in at the food delivery market.
Shares of Zomato opened at INR 63 apiece on Wednesday (May 17).
