ONDC to test Zomato's dominance; valuation mark-down likely: Analysts

Zomato may have to compromise on the margins whenever ONDC scales up. Its valuation multiples may see up to 20 per cent correction, analysts said

Zomato shares may see limited upside in the near-term amid news-flow around government-backed ONDC expanding its footprint in the delivery market, believe analysts.

Zomato shares have dropped 4 per cent in three days on the BSE. By comparison, the benchmark S&P BSE Sensex has added 0.2 per cent.

"Food delivery orders are being placed increasingly through ONDC. So, it could emerge as a strong competitor to Swiggy and Zomato. That said, it may be too early to predict anything, and thus, the stock may remain subdued," said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

ONDC (Open Network for Digital Commerce) is a government-backed company, allowing online businesses to sell their products directly to consumers, without the intervention of a third party. Besides food, ONDC also delivers groceries, home décor, and cleaning essentials.

Valuation concerns

ONDC's popularity has gained currency at a time high interest rates have raised concerns around valuations of loss-making new-age companies, said analysts. G Chokkalingam, founder and head of research at Equinomics Research, sees a 15-20 per cent downward revision in Zomato’s valuation multiples going ahead.

"Zomato may have to compromise on the margins whenever ONDC scales up. Current valuations are unjustifiable given the company is not profitable," he said.

Zomato is currently valued at 153.3x FY25E EV/EBITDA and 164.3x FY25E price-to-earnings ratio.

On its part, US investment firm Invesco, recently, marked down Swiggy’s valuation to about $5.5 billion vs $10.7 billion-valuation seen in January last year.

Abhisek Banerjee, analyst tracking new-age companies at ICICI Securities sees the mark-down in Swiggy’s valuation as a reflection of the correction in Zomato stock price from Rs 130 to Rs 65.

Market share loss

That said, analysts expect ONDC to eat into Zomato's market share in the long-run if more restaurants partner with it. The commission charged by Zomato from restaurants, reports suggest, is much higher than that charged by ONDC.

Another concern, they believe, is the possibility of ONDC sharing user data with restaurants, which Zomato/Swiggy have refused so far. ONDC has partnered with Paytm, which could help the platform scale up the average number of orders.

"All these factors could challenge Zomato's market dominance as restaurant on-boarding by ONDC could be faster-than-anticipated by Street," said Aditya Shah, founder and Chief Investments Officer (CIO) of JST Investments.

Motilal Oswal Financial Services believes ONDC will become a significant threat as and when it scales up in multiple categories (food, ecommerce, grocery), giving it the scale to override the delivery scale of the existing players.

"ONDC may impede the expansion of take rates (the commission fee charged by a marketplace for a transaction it facilitates on its platform) in the near-term. If Zomato's take rate rationalization exercise is slowed down, it could potentially delay the company’s timeline for achieving profitability, which remains a key risk at this stage," MOFSL said in its report.

That apart, analysts expect restaurants to pay commission to ONDC to scale up its infrastructure. While this may perk up prices, the effective delivery charge for customers will still be relatively lower than Zomato or Swiggy.

ONDC has reportedly capped the incentives for subsidising delivery cost for buyers with effect from May 9. Also, the price difference between ONDC and Swiggy-Zomato, which had gone up to 50-60 per cent, may now be reduced to 10-15 per cent.

Against this backdrop, Aditya Shah of JST Investments suggests new investors wait a couple of quarters before adding the stock to their portfolio. Chokkalingam, meanwhile, advises investors to sell the stock on rallies.