Zomato a value stock, unlike what street believes, says ICICI Securities; sees 70% upside potential

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Updated: August 23, 2021 1:12 PM

The brokerage firm’s assertion that Zomato is a value stock goes against some known value investors.

Zomato share priceZomato share price was down in the red on Monday. (Image: REUTERS)

Going against the analysis of some value investors, domestic brokerage and research firm ICICI Securities has termed the newly listed Zomato as a value stock, unlike what the street believes it to be. Initiating the coverage of Zomato, ICICI Securities said that the food-tech giant could scale as much as 70% from current levels. On Monday morning, the stock was down 7%, hitting an intra-day low of Rs 129.4 apiece. Anchor investors of Zomato, who pumped in Rs 4,196 crore into the IPO last month can sell their holdings in the month-old market debutant stock from today, ending the lock-in period. 

Check live price: Zomato

Bucking the trend

Given that Zomato is still a loss-making entity, ICICI Securities said that PEG (Price/Earnings to Growth) ratio is a better metric against P/E ratio for relative comparisons. “At 0.5x FY24E PEG, Zomato is significantly cheaper v/s median food services (1.9x), technology (1.8x) or consumer (2.9x) stocks. We value the stock at 55x 2-year forward P/E, in-line with median consumer discretionary multiple. Initiate coverage with Zomato as TOP-BUY in our coverage,” they said. 

The brokerage firm’s assertion that Zomato is a value stock goes against some known value investors. Earlier, after the listing of the stock, Aswath Damodaran, one of the world’s top valuation gurus, valued Zomato at just Rs 41 apiece. Aswath Damodaran — the Professor of Finance at Stern School of Business, NYU — had said that the stock is too expensive, considering the loss-making entity it is right now. Separately, Big Bull Rakesh Jhunjhunwala had also steered clear of Zomato, saying that it was a party he was not eager to attend. 

What could help growth?

ICICI Securities expects a robust 46% to 33% revenue CAGR over the financial years 2021 to 2026 and financial year 2021-2031 given multiple macro and industry tailwinds. The brokerage firm expects that their is growth potential for the industry, estimating 6% adoption of food-tech in the Next-500 towns of India. “With supply interventions and stronger network effect, we see scope for further increase in adoption also given the lower restaurant density here. However, as offices resume and corporate employees return to Top-20 cities, any change in the dynamic of these markets (where Zomato leads Swiggy in market share) needs to be closely watched,” they added.

Zomato is also expected to benefit from the return of the old normal. The domestic food-tech giant, contrary to its global peers such as Deliveroo and DoorDash, witnessed a sharp fall in key metrics like GOV / revenue in the first few months of the lockdown. “Accordingly, we expect a robust recovery going ahead,” ICICI Securities said. “This bounce-back should more than offset the unlock-led uptick in physical channel activity in the near term. The normalisation of the average order value and increasing bargaining power of restaurants are key variables to watch out for.

Target price

ICICI Securities has a target price of Rs 220 per share on Zomato, over 70% up from today’s low of Rs 129.4 per share. Our TP bets on ~22 million Indians ordering ~4 times/month in FY25E. This is a low bar given that India ‘today’ has ~35 million/114mn credit card/Paytm transacting users who likely fall in the superuser category/user funnel. Likely lower discounts than the base case (< Rs 15 / order) and scaling up in attractive adjacencies pose a key upside risk to ICICI Securities’ estimates and target multiples.

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