Zomato sinks to a new low, 4 factors why the stock is being hammered

Zomato Ltd on May 10 sank to a new low as it closed at Rs 52.45 on BSE, down 7.6 percent from the previous day.

The downward spiral has pushed the stock more than 30 percent down from the issue price of Rs 76. Zomato listed on the bourses on July 23, 2021.

The share hit a record high of Rs 169.10 on BSE on November 16, 2021 but has since tanked more than 70 percent, with investors losing nearly Rs 1 trillion in market value.

The food delivery platform is trading below its last private valuation of $5.4 billion in early 2021. Swiggy, Zomato's rival, was last valued at $10.7 billion.
Investors are keenly awaiting its March quarter earnings, the date for which is yet to be announced.

According to six analysts polled by Bloomberg, revenue is likely to be at Rs 1,256 crore, while the loss for the March quarter will be at Rs 372 crore

Despite the continuous fall, Zomato has 15 buy ratings, three hold and one sell rating, Bloomberg said.

Here are the key reasons why Zomato has taken a beating:

1 Volatile market: Analysts say this can be partly attributed to global factors including rising interest yields, the Russia-Ukraine war, surging inflation and the company's reluctance to host analyst/investor interactions (while selectively sharing data/comments on Twitter), an equal, if not greater, contributory factor is investor concerns related to the operating business.

Also read: Zomato founder Deepinder Goyal to donate ESOP proceeds worth Rs 700 crore to Zomato Future Foundation

2 ESOP expenses: Investors are not happy after many newly edged firms, including Zomato, reported high ESOP expenses, limited disclosures with respect to the actual vesting period and the impact on profitability. Investors are concerned that these companies may continue to roll out large ESOP schemes every three-five 5 years under the guise of retaining talent.

"While we concur that ESOP roll-out is likely to be a recurring and necessary exercise, we believe some sanity will kick in on the quantum as the impact of the on-going schemes wanes,” JM Financial said in a March 2 report.

3 Investments in loss-making firms:  Zomato's investment in Blinkit, Shiprocket  and Magicpin, where Managing Director Deepinder Goyal has had personal interest or involvement, does raise questions of conflict of interest.

"We also fail to understand the apparent oversight from the Street in raising these concerns during the IPO process as it was fairly known at that time also, at least in the case of Blinkit.

“We would expect the company/management to build investor confidence by being more forthcoming and upfront about such strategic initiatives (as the core business itself is far from mature) through regular analyst/investor calls instead of selective commentary on Twitter,” JM Financial report added

4 NBFC licence: Zomato recently announced plans to extend short-term credit to delivery partners, customers, and restaurant partners, claiming it would add value and improve experience for its partners.

"We await more disclosures as lending from own/subsidiary books may end up affecting the balance sheet and may not be perceived favourably by the investors as it will be a non-core investment,” analysts said.