Shares of Zomato fell for second straight day, down 9 percent in two days to Rs 182 per share on May 14 in spite of brokerages maintaining bullish calls on the stock and raising target prices following in-line Q4 results. According to analysts, Zomato is expected to deliver strong growth over the next few years, driven by order frequency and an increase in customer base.
Zomato’s path to profitability could be quicker than anticipated with improving contribution margins. Brokerages see up to 26 percent upside in the stock from the previous close of Rs 196 per share.
The food aggregator on May 13 reported a net profit of Rs 175 crore for the January-March (Q4FY24) period, marking the fourth straight quarter of the company's earnings coming in the green. During the same quarter last year, Zomato had posted a net loss of Rs 188 crore.
Its revenue rose 73 percent YoY to Rs 3,562 crore at a time when the broader e-commerce sector was reeling under the pressure of high inflation and muted demand.
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Unrivalled leader in hyper-local delivery in India?
Zomato said its margin expansion continues in both food delivery and quick commerce. Its quick commerce business, Blinkit, reached an adjusted EBITDA break-even mark for March 2024. The company said that Blinkit plans to raise dark store count from 525 in Q4FY24 to 1,000 by the end of this fiscal.
"While this shall impact short-term profitability, this shall cement Blinkit as the clear leader in quick commerce," said Nuvama Institutional Equities.
"We anticipate the aggressive addition of dark stores to hurt margin expansion for Blinkit in the next two quarters, but this effect is expected to be more than offset by higher margins in FY26," said Nuvama as it maintained a 'buy' call on Zomato with a revised target price of Rs 245, up from Rs 180 earlier.
According to Nuvama analysts, achieving the target of 1,000 dark stores by FY25-end will not be straightforward in terms of growth, dark store additions or profitability, but the robust track record of management instils confidence in their ability to execute this ambitious objective.
"Blinkit's dominant position in quick commerce is poised to establish Zomato as the unrivalled leader in hyper-local delivery in India," the brokerage said.
Brokerages raise Zomato share price targets
Zomato holds a cash balance of Rs 12,240 crore. Additionally, the company proposed the creation of a new ESOP pool, amounting to 2 percent of the diluted share capital, to drive better performance from employees.
CLSA highlighted Zomato's strong guidance for Blinkit despite ESOP's impacts on profits in Q4. According to the brokerage, the company's food delivery remains steady, although ESOP costs affected Q4 and are anticipated to rise further in the future.
It maintained a 'buy' rating on the stock but raised the target price to Rs 248 per share, mentioning Zomato's clear focus on quick commerce growth.
Bernstein in a post-earnings report mentioned that Zomato's Q4 performance has reinforced their conviction in the quick commerce business. Zomato achieved a significant milestone with Blinkit reaching breakeven and showing positive EBITDA in March.
The company plans to prioritise growth while maintaining a long-term adjusted EBITDA target of 4-5 percent.
Zomato's EBITDA margin for Q4 came in at 2.4 percent, falling short of estimates. However, the contribution margin for food delivery increased to 7.5 percent and the contribution margin for Blinkit rose to 3.9 percent.
The core business of food delivery continues to demonstrate strength, Bernstein said as it maintained an 'outperform' rating on the stock with a raised target price of Rs 230 per share.
Also Read | Zomato Q4 results: Firm logs fourth straight quarter of profit at Rs 175 cr, revenue up 73%
Morgan Stanley also remains bullish on Zomato as it maintained an 'overweight' call on the stock with a target price of Rs 180 per share. The company's steady performance persists, with a focus on expanding its quick commerce operations, it said, adding that the adjusted EBITDA recorded a profit of Rs 194 crore, surpassing the estimated Rs 186 crore.
Nomura has also issued a buy call on Zomato, setting the target price at Rs 225 per share. The company is aiming for neutral EBITDA in the near term. Analysts anticipate quick commerce to achieve 65-99 percent year-on-year growth in gross order value (GOV) in FY25-26.
They also expect the quick commerce business to achieve a contribution margin of 4.6 percent and an adjusted EBITDA margin of 1.9 percent.
Modest returns in the near-term?
Jefferies has issued a buy call on Zomato, raising the target price to Rs 230 per share. The food aggregator has experienced significant growth over the past 12 months, evident in its share price movement, and the management acknowledges the high investor expectations. However, Jefferies advises that return expectations should be more modest, at least in the next few months.
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