Zomato’s share price rally not over yet: JM Financial says ‘buy’; check target price, upside

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Updated: July 29, 2021 3:02 PM

JM Financial in their note forecast a revenue CAGR of 46% over the financial year 2021-2026 and believe Zomato will reach operating profitability by Financial Year 2025.

Zomato share priceZomato’s stellar listing and its subsequent rally might not be over yet. (Image: REUTERS)

Zomato’s stellar listing and its subsequent rally might not be over yet. Domestic brokerage and research firm JM Financial has initiated the coverage of newly-listed food-tech giant Zomato with a ‘buy’ rating and a target price of Rs 170 per share. This implies an upside potential of 26% from current levels. “Zomato is poised to leverage the decadal growth opportunity in India’s on-demand hyperlocal delivery ecosystem. The company is a market leader in the food delivery vertical and (like some of its global peers) could explore adjacent growth opportunities,” analysts at JM Financial said in a note.

Zomato stock is trading at Rs 135 per share. In less than a week since listing on the stock exchanges, Zomato is now at a 77% premium over its IPO price of Rs 76 per share. Investors still seem to be gung-ho on Zomato shares, even despite big bull Rakesh Jhunjhunwala, and Aswath Damodaran – Professor of Finance at Stern School of Business, NYU – not painting a rosy picture of the company currently making losses.

Millennials and GenZ to help Zomato grow

JM Financial in their note forecast a revenue CAGR of 46% over the financial year 2021-2026 and believe Zomato will reach operating profitability by Financial Year 2025. “We expect this growth to be driven by the growing share of millennials/GenZ in the ‘earning’ population and fast-growing e-commerce penetration beyond Tier-1 cities,” they said. For Zomato’s Hyperpure business, JM Financial expects a sharp scale-up over the next 5 years, due to inherent benefits for Zomato such as access to a wider addressable market and increased loyalty from restaurants as well as customers.

Zomato could turn profitable by 2025

Zomato has not been able to mint profits at this stage and that continues to remain one of the overhangs for some investors. Analysts at JM Financial, however, believe the company could turn profitable in the financial year 2024-25 on a cash EBITDA basis. “Our analysis suggests the company can turn profitable in FY25 on a cash EBITDA basis if it were to reach annual order volumes of 1 billion (2.5x FY20 levels) and a contribution margin of ~ Rs 21/order,” they added.

JM Financial values Zomato at 11x EV/Adjusted sales as of March 2030 to better capture in the company’s long-term growth potential. “We discount this valuation back to September 2022 to derive our target price of Rs 170 per share and initiate with a ‘BUY’ rating,” they added.

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