Despite headwinds, Jefferies recommends buying Zomato stock. Here's why

With the sharp fall in its share price since listing, analysts at Jefferies suggest long-term investors 'buy' the stock

Shares of Zomato have tanked nearly 23 per cent in the last two trading sessions after the one-year freeze on all its pre-IPO (initial public offering) shareholding ended. Despite the concerns surrounding the profitability of the company, the acquisition of Blinkit —which experts feel will only lengthen its road to profitability — and the sharp fall in its share price since listing, analysts at Jefferies suggest long-term investors 'buy' the stock. They maintain a price target of Rs 100 as their base case.

Worries of tightening by the US Federal Reserve are weighing on the profitless Internet names globally, analysts said. The entire sector, especially the new-age firms, has been going through a period of readjustment as the focus is shifting from growth to cash flow.

FANGMAN stocks (Facebook, Apple, NVIDIA, Google, Microsoft, Amazon, and Netflix) are down 15-65 per cent year-to-date (YTD). This has also been impacting the global food delivery stocks which have seen a sharp YTD fall, with Zomato among the worst performing counters, analysts said.

Besides Zomato, that skidded 12.4 per cent on Tuesday. Shares of One97 Communications (parent company of PayTM), PB Fintech (parent company of Policybazaar), Delhivery and CarTrade Tech slipped up to 8 per cent. On a calendar year-to-date, Zomato is the top loser in this segment down nearly 70 per cent.

With regards to Zomato, tough times, Jefferies said, have already brought acute focus on cash flow across start-ups. Zomato management, it said, has also accelerated its journey towards better unit economics and is now eyeing a break-even in the food delivery business in the foreseeable future. Tight liquidity conditions, it said, will also push Swiggy to focus on profitability as it also builds businesses beyond the core, particularly its quick commerce offering under Swiggy Instamart.

According to block deal data, Moore Strategic Ventures sold 42.52 million shares of Zomato on Tuesday, at Rs 44 apiece, totalling Rs 187.1 crore.

With the worst of the competition behind, industry profit pool, Jefferies believes, should rise as the sector is already consolidated, unlike some of the other spaces in India where there is still this scope, which would result in the interim pain.

“The only exception to (Zomato) management's conservative stance is its decision to buy Blinkit, which may be driven by FOMO (fear of missing out) or protect its food delivery turf, as highlighted post acquisition. Time horizon is probably longer for the management, as against investors, as this business will likely be a cash guzzler in the medium-term. Zomato itself has guided for $400 million of investments over the next two years. This remains a medium-term concern for investors as this would weigh on company profitability,” wrote Vivek Maheshwari, Jithin John and Kunal Shah of Jefferies in a recent co-authored note.

With the fall seen in the last two trading days, Zomato, which debuted at the bourses on July 23, 2021, trades nearly 45 per cent lower as compared to its issue price of Rs 76 per share. The stock had hit a record high of Rs 169.10 on November 16, 2021.

“There are profitability-related concerns in some of these companies. With the overall market sentiment being cautious, these stocks are taking a beating. Investors, who even have a one-three year’s investment horizon, should avoid these counters,” said A K Prabhakar, head of research at IDBI Capital.

Following the sharp correction in Zomato share price since listing, the stock, according to Jefferies, now trades at 0.9x one-year forward EV/GMV (enterprise value/gross merchandise value) and 3.5x EV/revenue.