Quick commerce heats up: Can Zomato's Blinkit sustain its leadership?

Morgan Stanlely has an 'overweight call on Zomato with a price target of Rs 355 for the stock.

Competition in the quick commerce segment is heating up, with prominent players like Swiggy, Zepto, and Zomato raising money to grab a larger share of this evolving space. With the intensity of the competition increasing, debates about whether Zomato's Blinkit, the current market leader, can sustain its market share and margin dynamics are coming to the forefront.

On this issue, international brokerage Morgan Stanley has taken a clear stance. The brokerage believes that the market is overly concerned about near-term challenges. Morgan Stanley, on the other hand, sides with Zomato, as it expects Blinkit to capture a disproportionate share of the profit pool in the large addressable market of quick commerce (QC).

"We see Blinkit as well-positioned to maintain market share and achieve a $1 billion profit pool by 2030," Morgan Stanley stated. Regarding the market's reaction to Zomato, Morgan Stanley feels that near-term cuts to consensus profit forecasts are likely to be ignored, provided the food delivery aggregator surprises on the top line and maintains market share in its QC business.

Given that Blinkit has already lowered the threshold on profitability by keeping adjusted EBITDA margins near break-even, the brokerage anticipates superior unit economics, a stronger balance sheet, and strong consumer positioning (in terms of assortment and app interface) will enable Blinkit to maintain a market share exceeding 40 percent by FY27, despite intense competition.

The bullish outlook for Blinkit stems from its significant advantage of having a larger cash balance compared to competitors, which, in Morgan Stanley's view, minimises the risk of irrational pricing competition within the sector.

Additionally, new entrants face challenges related to channel conflicts, particularly those originating from traditional e-commerce backgrounds, further complicating their ability to navigate the market effectively.

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Moreover, Morgan Stanley, like many others on the Street, projects that the QC market will surpass food delivery in terms of gross order value (GOV) by 2025. Despite increasing competition, the brokerage believes the larger addressable market offers significant growth opportunities for all players over the next 3-5 years. "The real challenge of growth and potential market share loss will arise as the overall market matures," it noted.

The Bear Case: Price target Rs 160, 44% downside

In its bear case projections, Morgan Stanley sees shares of Zomato plunging by around 44 percent to stock price levels of approximately Rs 160 if the expansion of the overall online food delivery market falters and reaches only $13 billion by FY27, accounting for just over 14 percent of India's food services market.

The Base Case: Price target Rs 510, 9% upside

In its base case expectations, Morgan Stanley anticipates Zomato shares to deliver moderate returns of around 9 percent if the online food delivery market experiences slower growth, expanding to $16 billion by FY27, representing 21.5 percent of India's food services market.

The Bull Case: Price target Rs 360, 80% upside

Under its most bullish assumptions, Morgan Stanley predicts the stock could skyrocket by close to 80 percent, based on the premise that the online food delivery market grows to $23 billion by FY27, representing a 25.7 percent share of India's food services market.

Morgan Stanley has an 'overweight' call on Zomato, with a price target of Rs 355 for the stock as of now.

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