Zomato stock rally may show signs of exhaustion from here on: Analysts

This is because the stock price of Zomato is factoring in all the positives, including earnings growth

India's first-ever listed new-age company, Zomato, has seen a meteoric rise in its stock price in calendar year 2023 (CY23), rising 70.75 per cent during this period as compared to 9.5 per cent rise in the S&P BSE Sensex.

From being the second worst hit new-age stock in CY22, crashing 57 per cent on the National Stock Exchange (NSE), the stock hit the Rs 100-mark for the first time since January 2022 in late August.

The stellar run in the stock – only after PB Fintech and One97 Communications-owned Paytm, analysts say, may be coming to an end, at least for now.

This, they believe, is because the stock price is factoring in all the positives, including earnings growth. That apart, possible and regular exits by some pre-IPO investors as well as by erstwhile investors of Blinkit may weigh on the stock in the near-term.

"Sustaining growth in gross order value (GOV), and strong contribution margin improvement of the core food delivery business for an extended period are the key monitorables for Zomato going ahead," said Deepak Jasani, head of retail research at HDFC Securities.

The food delivery platform reported a consolidated net profit of Rs 2 crore in Q1-FY24 as against a loss of Rs 186 crore in the same quarter last year. It's revenue from operations grew 71 per cent year-on-year. while it reported Ebitda gain of Rs 12 crore.

Its GOV jumped to Rs 7,318 crore from Rs 6,425 crore YoY and from Rs 6,569 crore  QoQ. The average monthly transacting customers were at 17.5 million in Q1-FY24 versus 16.7 million last year.

Zomato has been taking steps to improve its cash flow. It relaunched 'Zomato Gold' in January 2023 in a bid to drive order volume. Besides, in August, it began testing the imposition of platform fee of Rs 2-3 per order.

Zomato reported 2.7 million high-frequency customers in CY22, with annual ordering frequency of over 50. Analysts believe if these customers transact 75 times a year on an average, then a Rs 2/order platform fee can result in Rs 40.5 crore of incremental contribution profit/Ebitda for the company.

That said, the average price target for the stock, as per 27 brokerages polled by Bloomberg, is Rs 103, up 1.6 per cent from current levels.

Technically, too, the stock is testing the upper end of the Bollinger Bands on the daily and weekly charts, at Rs 101 and Rs 103, respectively. The Relative Strength Index (RSI), one of the key momentum oscillators, is also close to the 'overbought' level.

Charts show immediate supports at Rs 95 and Rs 91. On the upside, the next hurdle is at Rs 108.

Industry dynamics and growth prospects

India's online food delivery market (pre-pandemic) stood at $4.2 billion, which, as per Technopak, is poised to touch Rs 6.51 trillion by FY25, growing at a 9 per cent CAGR. 

 

Zomato remains the market leader in the food delivery market with a relative market share of 55 per cent in H2-CY22, up from 47 per cent in H1-CY20.

Given this, Equirus Securities has initiated coverage on Zomato with a 'Long' rating, and a December 2024 target of Rs 135. It expects Zomato to drive a 31 per cent sales CAGR over FY23-FY28, with growth rate moderating to 16 per cent over FY28-FY38.

Adjusted Ebitda margin, it said, may touch 19.2 per cent/24.1 per cent by FY28/FY38.

Ventura Securities, meanwhile, expects Zomato’s revenue to grow at a CAGR of 41.9 per cent to Rs 20,215.5 crore by FY26, driven by 31.7 per cent CAGR growth in food delivery revenue to Rs 10,632 crore, Hyperpure CAGR of 62.4 per cent to Rs 6445.9 crore, and Blinkit CAGR of 51.4 per cent to Rs 2,797 crore.