Zomato Surges To 52-Week High, Crosses IPO Price Band First Time Since April 2022

Shares of foodtech giant zomato continued their winning streak for the sixth consecutive session on Friday (June 9), in the process crossing its IPO price band of INR 72-INR 76 for the first time in over a year.

The company’s shares ended the session 2.3% higher at INR 77.57 on the BSE. Zomato shares jumped almost 3% during intraday trading to a 52-week high of INR 77.95 on the BSE today. The stock last closed at this level in April 2022.

Shares of Zomato made a bumper debut on the stock exchanges in July 2021, listing at INR 116 on the NSE and INR 115 on the BSE, at a premium of 53% to the IPO price of INR 76. However, the journey after that hasn’t been easy.

The macroeconomic downturn, which impacted tech stocks globally, Zomato’s lacklustre financial performance, and its acquisition of Blinkit led to a sharp decline in the share price.

Besides, some of the institutional investors like Uber, Alibaba’s Alipay, and Moore Strategic Ventures offloading their stake in the Deepinder Goyal-led company further hurt investor sentiment.

Consequently, Zomato shares touched a low of INR 40.5 in July last year within a month of it announcing the acquisition of loss-making quick commerce startup Blinkit amid mounting losses. Zomato’s net loss widened to INR 1,222.5 Cr in FY22 from INR 816.4 Cr in FY21.

However, several market analysts are now of the opinion that the worst is over for Zomato as the company’s financial performance has improved and it is moving towards profitability. They believe that the rally in the stock is likely to continue from here on.

Speaking to Inc42, an analyst said that Zomato is expected to rally in the near term and it wouldn’t be a surprise if it reaches INR 90-INR 100 level.

Meanwhile, Kunal Shah, senior technical and derivative analyst at LKP Securities, said, “We are expecting Zomato’s momentum to further continue towards the level of INR 92-INR 93 in a few weeks’ time.”

“Even in the next 1-2 months, I don’t think this level will be affected by the selling pressure as that is also the resistance zone for the stock,” he added.

However, what led to this turnaround in Zomato’s performance? 

March Towards Profitability 

The global economic downturn and rise in interest rates by central banks last year made investors cautious and avoid loss-making companies. 

As most of the new-age Indian tech companies like Zomato, Paytm, and PB Fintech listed on the bourses at premium valuations despite being in losses, they were hit hardest by the market downturn in 2022. Most of these stocks corrected by 30%-60% during the year.

This made most of these new-age companies, including Zomato, focus on profitability by cutting down their expenditure. Zomato laid off employees and undertook other restructuring exercises to cut its costs, and this resulted in the company reaching adjusted EBITDA profitability in Q4 FY23, excluding Blinkit, ahead of its own target and the Street consensus.

Zomato was also helped by the overall improvement in sentiment towards new-age tech stocks as others like Paytm and PB Fintech also made huge strides forward towards turning profitable.

Analysts said Paytm achieving its adjusted EBITDA profitability target ahead of expectations in Q3 FY23 and Zomato following the same path in Q4 helped turn the tide in favour of new-age tech stocks. Fintech major PB Fintech also announced achieving break even on a consolidated basis in Q4 FY23 as it reported an adjusted EBITDA of INR 28 Cr in the quarter. 

Following this, the market is now bullish on these startups as they are expected to achieve their net profitability targets. 

Unlike other startups, Zomato enjoys a duopoly, along with Swiggy, in the foodtech space. While the advent of ONDC seemed like a threat to this duopoly, several brokerages have concluded that it wouldn’t affect Zomato in the near future. 

This week, Jefferies’s Chris Wood also added Zomato to the India long-only portfolio with a 4% weightage on the stock. 

However, it must be noted that though Zomato’s path to profitability now looks clearer than ever before, the food delivery business has been slowing down for the last few quarters and Blinkit continues to pile on losses.

Zomato currently aims to turn its consolidated business profitable on an adjusted EBITDA basis within the next four quarters. It has also expressed hope of achieving net profitability in the same time frame.

Will Blinkit Pain Ease?

In the March quarter of FY23, Zomato’s consolidated net loss narrowed 48% year-on-year (YoY) to INR 187.6 Cr while its operating revenue rose 75% to INR 2,056 Cr. 

While its food delivery business generated INR 78 Cr of adjusted EBITDA profit in the quarter, Blinkit’s business generated INR 203 Cr in adjusted EBITDA loss, the highest among its verticals.

Meanwhile, Blinkit’s average order value (AOV) declined 6% to INR 522 in Q4 from INR 553 in Q3. However, its contribution margin improved to -2.7% in the last reported quarter from -4.5% in Q3 FY23.

ICICI Securities believes that given the current trends, both the Blinkit business and Zomato’s B2B hyperpure business can turn profitable (on an adjusted EBITDA basis) by FY27.

Meanwhile, Motilal Oswal, in its recent initiation note on Zomato, said that though Blinkit is scaling up well and improving on profitability, the quick commerce space is still nascent for Zomato given the large number of players in the ecosystem.

Amid all this, Zomato also faced public backlash this week for its advertisement on World Environment Day. Following this, the company decided to take down the advertisement. Of course, this had no impact on investor sentiment as the stock continued on its upward trajectory.