Zomato’s Remarkable Turnaround: After A Painful 2022, Stock Up Over 90% In 6 Months

Zomato’s Remarkable Turnaround: After A Painful 2022, Stock Up Over 90% In 6 Months

SUMMARY

Shares of Zomato, which fell over 60% in 2022, have been on an uptrend this year following a change in investor sentiment and its financial performance

Zomato surprised the Street by reporting a net profit of INR 2 Cr in Q1 FY24, which strengthened the rally in its stock price

The company’s latest move to levy a platform fee on food delivery orders has further strengthened investor confidence

After a dreadful 2022, during which Zomato’s market cap declined over 60%, very few would have predicted a sharp reversal in the fortunes of the stock. However, on the back of a change in investor sentiment and improvement in the foodtech giant’s financial performance, the stock has surged over 90% in the last six months on the BSE.

Currently trading at INR 102.14 on the exchange, Zomato shares are at a level last seen at the end of January 2022.

After a bumper debut on the bourses in 2021, shares of Zomato began witnessing a downfall after January last year, hitting new record lows frequently. Within six months, the stock hit its all-time low of INR 40.55 in July last year, which was almost 65% lower than its listing price of INR 115.

The major hit came after Zomato’s acquisition of quick commerce platform Blinkit, which, the Street believed, would further delay its profitability timeline.

Several of its early investors also started to offload their stakes in the startup, putting further pressure on the stock. 

Soon, Zomato’s market cap fell below $5 Bn from $14 Bn after its listing in July 2021.

Around the same time, market expert and professor Aswath Damodaran, who is also known as valuation guru, assigned a price target (PT) of INR 35.32 for the stock.

Global macroeconomic factors, besides business-specific issues, added to the woes of not only Zomato but also other new-age tech startups like Paytm, Nykaa, and PB Fintech. 

While the stock remained under pressure till January this year, it started seeing a recovery from then. The uptrend only became stronger from March 2023.

An overall turnaround in market sentiment and Zomato’s aggressive steps towards achieving profitability, changed the narrative. From a market cap of around $5.3 Bn at the end of March this year, the foodtech startup’s valuation crossed the $6.5 Bn mark in a month.

After the company reported a profitable Q1 FY24, its market cap touched the $10 Bn mark in August. Currently, Zomato’s market cap stands at $10.5 Bn.

So, What Led To This Turnaround?

While the results are visible only now, Zomato started taking measures around the December quarter last year to improve its financial performance and attract investors, who were increasingly focusing on profitability. 

From laying off some of its employees to exiting over 200 cities that were showing less “encouraging performance”, the management started cutting costs. On the other hand, it also started experimenting to shore up its revenue. For instance, Zomato increased the commission fees it charges from restaurants and grew the number of Blinkit dark stores. 

Though Blinkit continued to drag down the overall financial numbers, Zomato claimed adjusted EBITDA profitability in Q4 FY23, excluding the quick commerce business, largely helped by an improvement in its food delivery business.

This announcement in May further fuelled the rally in the stock.

So strong was the momentum that the talks about the Open Network for Digital Commerce (ONDC) emerging as a threat to Zomato’s food delivery business and protests of Blinkit delivery executives also failed to have any major adverse impact on the stock.

Zomato's Ups and Downs

In fact, most brokerages turned more positive about Zomato’s goal to achieve net profitability. 

Soon, in August, Zomato reported a profitable Q1 with a net profit of INR 2 Cr with improvements across verticals. Though Blinkit continued to be a challenge, the quick commerce business turned contribution positive for the first time ever in the month of June 2023.

However, it must be noted that the net profitability was achieved on the back of a deferred tax of INR 17 Cr in the quarter. But this didn’t dent the Street’s euphoria, as shares of Zomato have jumped over 18.5% in the last one-and-a-half month.

Several analysts have also raised their price targets (PTs) on the stock in the recent past. While raising its PT, Bernstein said in a recent report, “The company’s strong execution (market leader, 55% share) & ‘profit beats’ has reinforced investor confidence.”

Zomato’s average PT stands at INR 104.4, as per the consensus of 24 analysts covering the stock.

Zomato’s Latest Gambit – Platform Fee 

Following its competitor Swiggy’s move, Zomato also introduced a platform fee of INR 2 per food delivery order in August. Soon, it hiked the fee to INR 3 for certain cities and users.

Zomato told Inc42 last month that it was still experimenting with the new feature. 

It’s clear that Zomato is looking at improving its top line as well as bottom line with the levy of platform fee. In its Q1 results, Zomato said it is confident of remaining profitable going forward. If there were any doubts about the company’s ability to do so, the introduction of platform fee seems to have convinced most investors that Zomato could improve its margins and stay profitable.

In a recent report, brokerage Kotak Institutional Equities said the platform fee will increase Zomato’s customer take rate and contribution margin.

The INR 2 per order platform fee would result in INR 40.5 Cr of incremental contribution to its profit/EBITDA, the brokerage said.

While everything looks positive for the stock right now, investors will closely look forward to the company’s Q2 performance, which is expected to trigger the next major trend in its price.

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