Brokerages expect better appetite for Zomato stock after strong Q1

It jumps 20% after a strong Q1 showing; analysts turn bullish indicating an upside of 60%

Food aggregator Zomato’s share price surged almost 20 per cent and closed at Rs 55.60 per share on the BSE on Tuesday, a day after it reported strong revenue growth and narrowed its net loss. The stock price was frozen at the upper circuit with only buyers at the counter for almost the last two hours of trading.

The strong showing in the June 2022 quarter has also turned brokerages bullish on the stock, with most of them recommending “buy”. The target prices range between Rs 60 - 115. The average target price of Rs 89.13 indicates potential upside of 60 per cent from current levels.

For Q1 FY23, Zomato’s net loss came in at Rs 186 crore, sharply down from a loss of Rs 359.7 crore in Q4FY22 and Rs 359 crore a year ago. The company also reported 67 per cent YoY growth in revenue to Rs 1,414 crore.

Though the revenue was largely in line with the Bloomberg poll estimate of Rs 1,403 crore, the operating performance was much better than expected. For example, the operating loss came in at Rs 349 crore, against the consensus loss estimate of Rs 434 crore. Likewise, net loss was also lower than the estimate of Rs 262 crore.

Some other noteworthy factors that pushed the stock included gross order value (GOV) of food delivery which jumped 10 per cent QoQ and 42 per cent YoY, aided largely by growth in volumes, and mild growth in average order value or AOV (1-2 per cent). The company also broke even on an adjusted Ebitda basis during the quarter (versus -1.3 per cent and -2.2 per cent in Q4 and Q3, respectively).

A UBS report stated Zomato breaking even in terms of adjusted Ebitda was a significant positive for the firm. “We will look out for commentary on the demand outlook for FY23-24, further colour on the path to profitability, and views on the acquisition timelines, and consolidation of Blinkit. Overall, a strong set of results with key numbers all ahead of our estimates.” said the report. “We believe the growth drivers continue to remain strong and losses continue to reduce QoQ, which is a positive. We maintain ‘buy’,” added the brokerage’s analysts.

The other positive was continued growth in the Hyperpure business, which posted revenue of Rs 272.7 crore in the June quarter, up 24 per cent YoY and 40.4 per cent sequentially. Also, there was an uptick in monthly transacting users (MTUs) in the food delivery segment. MTUs increased 36 per cent YoY and 6 per cent QoQ.

“We think this MTU addition is impressive in the light of the fact that: (1) Advertising and/or discounting does not seem to have increased in Q1, and (2) this was the first post-Covid quarter with offline footfall resuming. Zomato was still able to grow food delivery GMV (gross merchandise value) 10 per cent QoQ,” said a Kotak Institutional Equities Research report.

After the June quarter results, several brokerage houses have given a “buy” rating for Zomato. For instance, HSBC in its report said: “We think FD (food delivery) is a well-established industry now. Unit economics are gradually improving with scale benefits, reduced discounts, and an increase in delivery charges. We don’t think it’s a hyper-growth industry but think 15-20 per cent CAGR growth is possible over the next 5 years. Overlay this with the hyperlocal opportunity, and we think the stock appears compelling now. Admittedly, relative to global peers, Zomato may still appear expensive, but on our DCF (discounted cash flow) the implied growth rates are not very punchy, hence we rate the stock ‘buy’.”

Garima Mishra and Shubhangi Nigam of Kotak Institutional Equities Research in their report said: “We have increased our FY2023-25 revenue estimates largely on account of the better-than-expected performance by the Hyperpure business. Higher contribution margin assumptions for FY23-25 in the food delivery business lead to lower loss forecasts.”

The bullish views come after a long period of downtrend. Shares of Zomato, which came out with an IPO last July at Rs 76 per share (face value Re 1), closed at Rs 126 on the first day of its listing (July 23, 2021) and touched a high of Rs 169.10 in mid-November. Since then, it had been on a declining trend, and hit an all-time low of Rs 40.55 last week on the BSE. The sale of 7.8 per cent stake in Zomato by an investor, which is expected on Wednesday (August 3), could put some downward pressure on the stock in the interim.