Morgan Stanley has maintained its "Overweight" rating on Zomato, with a target price of Rs 278 per share, implying a nearly 8 percent upside from the last closing price.
Recent news indicates rising competitive intensity in the quick commerce (QC) business, which the brokerage views as a sign of the growing importance of this channel. However, it also acknowledges that heightened competition could delay profitability assumptions.
Analysts at Morgan Stanley emphasised that retaining market leadership is crucial for Zomato, even if it means postponing profitability. They believe that staying ahead in the competitive landscape is essential for the company’s long-term success.
The broking and research firm suggests that any short-term pullback in Zomato's stock price due to increased competitive activity could present a valuable opportunity for long-term investors to accumulate shares. The firm remains optimistic about Zomato's potential, despite the challenges posed by a competitive market environment.
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Recently, Zomato reported net profit growth of 126.5 times on-year at Rs 253 crore in the April-June quarter even as the food aggregator hiked platform fees charged to consumers and saw an improvement in the operational profitability of its quick commerce arm Blinkit.
The management said in the earnings call that it has gained market share in the cities of Southern states, a region where initial public offering-bound Swiggy has historically dominated.
Multiple brokerage firms have estimated that Zomato's market share in India's food delivery sector has risen to around 55 percent, while Swiggy has lost ground. Experts note that Zomato took a different approach by placing early bets on non-metro cities, a strategy initially seen as unprofitable.
However, the company understood that these regions wouldn't deliver immediate returns but saw long-term potential.
The Deepinder Goyal-led company built its business with a localized focus, tailoring its strategy to fit each region's unique needs, from supply chain and marketing to restaurant partnerships. This approach has paid off, as Zomato has now surpassed Swiggy in profitability.
The Gurugram-based company has reported five consecutive quarters of net profits, while Swiggy recorded an operating loss of over Rs 1,000 crore in the first nine months of FY24, according to reports.
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Apart from food delivery, Zomato's quick commerce arm Blinkit has also become a bright spot for Zomato. The implied value of Blinkit is now larger than that of Zomato’s core business (food delivery), according to a Goldman Sachs note.
Zomato had acquired Blinkit for $568 million in 2022 but since then, on the back of improved performance, the latter’s implied valuation has grown to a staggering $13 billion, according to the international brokerage.
In the previous session, Zomato shares ended nearly a percent higher at Rs 259.25 on the National Stock Exchange (NSE). In the last one year, the stock has zoomed nearly 182 percent, nearly tripling investors' money. In comparison, benchmark Nifty's rose 25 percent during this period. Year-to-date, the counter has rallied 108 percent, outpacing Nifty's returns of around 11 percent in this period.
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