Zomato Shares Are Currently A Great Case For Long-Term Investors To Buy, Says Jefferies

At a time when Zomato shares are under severe stress with its stock price now running more than 63% lower than its debut price on BSE, Jefferies has reiterated its optimism about the long-term growth prospects of the stock.

With several investors currently selling Zomato stocks, largely driven by its recent Blinkit acquisition that elongates the former’s path to reach profitability, Jefferies analysts see this phenomenon as a great case for long-term investors to buy.

Jefferies has maintained its ‘buy’ rating and a price target (PT) of INR 100 on the Zomato stock. The brokerage’s upside scenario PT stands at INR 160 and the downside scenario PT is at INR 40.

Zomato announced acquiring quick commerce startup Blinkit for INR 4,447 Cr ($568 Mn) on June 24. The stocks started falling sharply in the following sessions post the deal. Though there were a few brighter days for Zomato stocks in between, the trend was largely downward.

However, several analysts across brokerages had already predicted that the deal would be a near-term lag on the stock.

As the lock-in period for Zomato stock ended this week, the shares started tanking severely to hit new all-time lows. During the intraday trading on Tuesday (July 26), the shares recorded a low of INR 41.04.

Meanwhile, Jefferies has noted that Zomato is not the only internet stock hit badly if studied on a global level. 

It is pertinent to note that worries of Fed tightening are weighing on a majority of the internet names, globally, including the foodtech companies, as the investors’ focus is now on cash flow across startups, as per the brokerage.

In fact, if we check the performance of Zomato’s listed global peers such as DoorDash, Delivery Hero, Just Eat Takeaway.com, Deliveroo, all of these stocks are down between 50%-65% year-to-date (YTD). However, it is true that Zomato is underperforming them significantly with shares trading down about 70% YTD.

On the other hand, FANGMAN is also down 15%-65% YTD.

The analysts also note that Zomato continues to trade at a significant premium to its global peers, particularly in terms of the financial ratio of enterprise value (EV)/sales and EV/Gross Merchandise Value (GMV), and it is justifiable.

“[It] should be seen in the context of its superior growth trajectory, sizeable TAM, duopoly market structure, rising Internet adoption etc,” added the Jefferies analysts.

With a highly positive view of the stock in the longer term, the analysts expect its Adj. EBIDTA loss to get better each quarter given the management lowers its customer acquisition cost (CAC), reduces discounts, and increases take-rates, among others.

However, in this context, it is also important to note that Zomato already charges an 18%-25% commission from its restaurant partners. Being in a duopoly market, both Zomato and Swiggy have come under the Competition Commission of India’s (CCI) scrutiny for exorbitant commission and predatory pricing.

Recently, reports emerged that Domino’s Pizza’s Indian franchise might consider shifting some of its business from the two food delivery startups if commission increases further.

Following the same, Zomato has also confirmed that it has no plans to raise the commission. On the other hand, the startup has also discontinued the extension of its ‘Pro’ subscription for its existing users.

The Jefferies analysts also note that unlike in the past when Zomato planned to invest across multiple businesses it is now focusing on conserving cash. In this, perhaps, Blinkit was the only exception and has hit the company heavily.

Despite all the challenges, the analysts see a consistent improvement in profitability in Zomato’s food delivery business.

“We expect tight liquidity conditions to also push Swiggy to focus on profitability as it also builds businesses beyond the core (particularly its quick commerce offering under Swiggy Instamart), ” said the analysts. “With worst of the competition behind, industry profit pool should rise as the sector is already consolidated unlike some of the other spaces in India.”

Pegged at around $2.9 Bn in 2020, having witnessed a 32% decline due to the Covid-19 pandemic, the Indian online food delivery market is expected to reach about $13 Bn by 2025, as per a Statista report.