Zomato stock could now be an attractive entry point for long-term investors, according to analysts at global brokerage and research firm Jefferies. “Following the sharp correction in Zomato share price, the stock now trades at 0.9x 1Y forward EV/GMV and 3.5x EV/Revenue. While this is at a premium to global & regional peers, this is justified in the context of long growth run-way along with higher explicit medium-term forecasts on GMV,” a report by Jefferies said. The brokerage has pinned a target price of Rs 100 apiece. Zomato share price tanked 13% on Monday and another 7% on Tuesday to hit an all-time low of Rs 44.10.
The food delivery giant’s stock has been under pressure so far this year, falling 69%. “Worries of Fed tightening are weighing on the profitless Internet names globally. The entire sector has been going through a period of readjustment as the focus is shifting from growth to cash flow,” Jefferies said.
Focusing on cash conversion, profitability
Concerns around Zomato have been anchored on its lack of profitability. However, Jefferies believes the management has accelerated its journey towards better unit economics and is now eyeing a break-even in the food delivery business in the foreseeable future. “Adj Ebitda losses for 4QFY22 was <$30m, with food delivery losses at $10m. We expect this to get better quarter after quarter now as management lowers its CAC by tapping into its MAU to drive MTU, reduces discounts, increases take-rates among others,” analysts said. Zomato’s average order value stands at Rs 382 currently which is expected to steadily rise in the coming years.
Cash conversion by Zomato also augurs well for the stock. Earlier this year when the company acquired Blinkit, investors were seen exiting their position.
Blinkit aiding growth
“The only exception to mgmt’s conservative stance is its decision to buy Blinkit, which may be driven by FOMO or protect its food delivery turf, as highlighted post-acquisition,” Jefferies said. Analysts see Blinkint adding 20% to Zomato gross order value. “While Blinkit is one-fifth the size of Zomato currently (in GOV terms), in markets such as Gurugram, it is >60% of Zomato’s GOV,” the report highlighted.
Blinkit’s average order value in May 2022 stood at Rs 509, although this was lower than Rs 575 in January but the number of orders were higher at 7.9 million compared to 5.1 million in January. “Management sounded confident of achieving healthy profitability in quick commerce over time, as order density per dark store builds up further. Many of Blinkit’s dark stores are trending towards contribution break-even and a meaningful number of dark stores is expected to achieve contribution break-even over the next one year, as per management,” Jefferies said.
Bull, bear and base case
Bull case Zomato target price is pinned at Rs 160 per share. Here, a strong up-tick in new user acquisition/ order volume growth is projected and AOVs are also expected to hold at a healthy level. The downside scenario or the bear case scenario puts target price at Rs 40 per share. In the downside scenario, Delivery GOV growth is slower at 25% cagr over FY20-26E to reach $7 billion in FY26.
With 33% CAGR in delivery GOV over FY20-26E to reach $9 billion by FY26, the base case target price for Zomato is set at Rs 100 per share. “Unit economics is likely to dip in FY23 as Zomato invests behind new user acquisition and order volume growth, before recovering gradually over FY24-26,” the analyst said.