Zomato share price may rally 21%, says HSBC; grocery business termed ‘poison pill’, check target

Zomato stock price has plummeted 50% so far this year, erasing massive investor wealth as the scrip fell below the IPO price. Despite the fall in stock price, analysts at HSBC have maintained their ‘Buy’ call.

Zomato stock
HSBC had upgraded the stock to 'Buy' earlier in May this year. (Image: REUTERS)

Zomato stock price has plummeted 50% so far this year, erasing massive investor wealth as the scrip fell below the IPO price. Despite the fall in stock price, analysts at HSBC have maintained their ‘Buy’ call on the food delivery giant. HSBC has also maintained its target price of Rs 85 per share, which translated to a 21% upside from Wednesday’s opening price. HSBC said that synergies between Zomato’s Food Delivery (FD) and Instant Grocery business are key for the company. The global brokerage firm had upgraded the stock to a ‘Buy’ rating from ‘Hold’ earlier in May this year.

HSBC noted that investors are broadly divided on Zomato’s strategy to acquire Blinkit and some even question the merit of foraying into the grocery (hyperlocal) business. Analysts said that building a grocery business will work as a “poison pill” for Zomato. “It would need reasonably high investment and hence cash burn and is likely to be a significant logistical challenge to execute as well, but still Zomato can’t afford not to do it in our view,” they added.

Looking ahead, analysts note that synergies between the food delivery business and the grocery business would be key. “Going forward as the share of organic customers of Instamart grows, they are more likely to be target FD customers as well for Swiggy, thereby hurting Zomato’s core FD business. Consequently, Zomato has to build its Grocery capabilities quickly and in our view has to merge the apps effectively to leverage its customer base for grocery,” they added. Running the grocery business separately is unlikely to create much value, analysts believe. Currently, Blinkit — the grocery business and Zomato itself are offered as two separate applications.

Analysts said that Zomato could either go with the quick-commerce model for grocery business with 10-15-minute delivery or with a full kitchen offering that offers delivery the next day. “In our view, Zomato has to attempt to build its grocery business closer to the middle of this framework and leverage technology to design and manage its dark stores so as to offer 4-5K SKUs with 10-60m delivery TAT. Cross-selling to Zomato’s customer base, integrating the tech stack and building fulfilment infrastructure (as above) are top priorities for Zomato to build a successful grocery business, in our view,” they added.

The target price of Rs 85 per share implies a 21% upside from Wednesday’s opening price of Rs 70 per share. “Fundamentally, we believe unlike many other segments in the new-tech space, food delivery is relatively mature, with a healthy duopoly structure and clear value proposition,” analysts said.

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