Jefferies rates Zomato a ‘buy’, says Blinkit acquisition may have been FOMO

The analysts put the Blinkit buy down to FOMO (fear of missing out) or Zomato’s intention to protect its food-delivery turf and said it would be a cash-guzzler in the medium term and weigh on investors’ minds.

Interestingly, last year (report released on July 28, 2021) Jefferies had given the target price as Rs 170, when the stock was trading at Rs 132. They had been optimistic about delivery growth, the company's unit economics and strong balance sheet. That said, the analysts had mentioned "aggressive investments" because of significant cash on books as a key risk.

In the latest report, analysts wrote, “Worries of the Fed tightening and investor focus on cash flow have been weighing on the internet names, including food tech, globally. From an exuberance at the time of listing last year, Zomato is now unloved, having underperformed peers YTD.

"Blinkit acquisition elongates the path to profitability and despite management guidance on a break-even in food delivery, investors are not giving much benefit of the doubt. We think this makes for a great case for LT investors to buy,” Jefferies said in a report.

Times are tough now and companies are realising that cash is drying up, and the brokerage expects the company to act in alignment with that and reduce customer acquisition costs (CAC).

Also read:  Zomato's shares sale likely in tranches as lock-in for pre-IPO investors ends: Sources

“Zomato management has also accelerated its journey towards better unit economics and is now eyeing a break-even in the food delivery business in the foreseeable future. Adj Ebitda losses for 4QFY22 was<US $30m, with food delivery losses at US$10m. We expect this to get better quarter after quarter now as mgmt. lowers its CAC by tapping into its MAU to drive MTU, reduces discounts, increases take-rates among others,” they wrote. CAC is customer acquisition cost, MAU is monthly active users and MTU is monthly transacting users.

Jefferies believes the worst of the competition has passed, therefore the profit pool would increase since the sector is already consolidated. “We expect tight liquidity conditions to also push Swiggy to focus on profitability as it also builds businesses beyond the core (particularly its quick commerce offering under Swiggy Instamart),” its analysts said in the report.

They believe that the Gurgaon-based food aggregator will not be investing across multiple businesses like before, even if it is within its investments. “Unlike past where Zomato intended to invest across multiple businesses, with some strategic (eyeing an eventual merger) and others as financial investment, the company now intends to conserve cash. The company does not plan to commit any resources for existing or now minority investments,” the report said.

While the stock is trading at a premium to global and regional peers—at 0.9x 1Y forward EV/GMV and 3.5x EV/revenue–the analysts believe the price is “justified in the context of long growth run-way along with higher explicit medium-term forecasts on GMV (30% for Zomato vs. 10-20 percent for peers)”.

At 10.16 am, the stock was trading 7.04 percent down at the National Stock Exchange at Rs 44.25.

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