Global brokerage firm Nomura has increased its target price for Zomato to ₹280 from ₹225 while maintaining a ‘buy’ recommendation. This new target suggests a potential upside of over 9 percent. This comes after strong quarterly results for Q1FY25.
Nomura highlighted Zomato's significant growth potential and improving profitability in both its food delivery (FD) and quick commerce (Blinkit) businesses. The brokerage stated, "We note that Zomato’s high growth path with improving profitability has significant room to go in both the FD (food delivery) and Q-commerce (Blinkit) businesses. We raise our TP to INR280 (continues to be based on DCF) factoring in higher long-term growth in Blinkit. We raise FY25-26F EBITDA by 26-60 percent."
Zomato has delivered multibagger returns over the past year, with a rise of nearly 169 percent in the last 12 months and 112 percent year-to-date in 2024. The stock has posted positive returns in seven of the eight months this year so far.
Zomato's stock has increased over 14 percent in four sessions in August, following gains of 14.4 percent in July and 12 percent in June. The stock dipped 7.25 percent in May but experienced positive performance in the first four months of the year, rising 12.8 percent in January, 18.5 percent in February, 10 percent in March, and 6 percent in April.
The stock reached a record high of ₹278.45 on August 2 and is currently about 6 percent below this peak. It has surged 197 percent from its 52-week low of ₹88.16 seen on August 21, 2023.
Zomato’s consolidated net profit for Q1FY25 skyrocketed to ₹253 crore, up from ₹2 crore a year ago, driven by increased gross order value across its food delivery, quick commerce, and going-out verticals. This marks the fifth consecutive quarter of positive earnings for Zomato. The profitability was also boosted by higher other income, which rose to ₹236 crore from ₹181 crore a year earlier. This increase is attributed to the over ₹12,000 crore in cash reserves Zomato holds.
Revenue for Zomato surged 74 percent year-on-year in the June quarter, reaching ₹4,206 crore compared to ₹2,416 crore last year. Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) turned positive, standing at ₹177 crore, in contrast to an EBITDA loss of ₹48 crore during the same period last year. The EBITDA margin was reported at 4.2 percent.
Zomato's Gross Order Value (GOV) increased by 53 percent to ₹15,455 crore. The company defines GOV as the total value of orders from its consumer-facing businesses, including food delivery, quick commerce, and going out. Blinkit, Zomato's quick-commerce business, reported an adjusted EBITDA loss of ₹3 crore. The company added 113 stores, exceeding their guidance of 100 stores.
Food Delivery Growth: Nomura noted that Zomato's core food delivery (FD) business is on a robust growth path, with gross order value (GOV) rising by 9.8 percent quarter-on-quarter and 26.6 percent year-on-year, exceeding expectations. This growth was driven by a 7 percent quarterly increase in monthly transacting users (MTU). It further highlighted that Zomato has maintained its goal of over 20 percent growth in food delivery, citing macroeconomic conditions and execution as key factors.
The net take rate also improved by 40 basis points to 21.0 percent. Moreover, despite seasonal factors affecting the contribution margin, which stood at 7.3 percent, adjusted EBITDA increased by 60 basis points to 3.3 percent. Zomato aims to balance growth and margins, targeting a 4-5 percent adjusted EBITDA margin in food delivery. FD GOV is expected to grow 20-23 percent annually in FY25-FY26, with a contribution margin of 7.5 percent, predicted the brokerage.
Q-commerce Expansion: Blinkit, Zomato's quick commerce business, achieved a GOV of ₹4930 crore, up 22.2 percent quarter-on-quarter and 130 percent year-on-year, driven by a 19 percent increase in MTU and store expansion. With low market penetration, Blinkit plans to quadruple its store count to 2,000 by FY26, stated the brokerage. The company aims for self-sustaining store additions through internal accruals. Nomura expects Q-commerce to grow 100-110 percent annually in FY25-FY26, with Zomato nearing adjusted EBITDA breakeven at -0.1 percent and projects a +1.1 percent margin for FY25.
New Initiatives and Capital Strategy: The brokerage further underscored that Zomato announced the launch of a new app and brand “District” (in line with its house of brands philosophy) aimed at catering to ‘going-out’ businesses or local activities such as movies, sports ticketing, live performances, shopping, staycations etc. including Dining-out. Moreover, it added that Hyperpure continues to scale well (+27 percent q-q) and sees more penetration opportunity in restaurants while keeping minimum losses. Zomato noted no change to its capital allocation despite free cash flow generation given competitive dynamics in the market, informed Nomura.
It cautioned that key risks include capital allocation of $1.5 billion cash, slowing growth in FD and Q-commerce businesses.
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