In politics, there are no permanent friends or permanent foes, only permanent interests, as the saying goes. The same rule applies to the stock market too, when it comes to ‘buy’ and ‘sell’ ratings — they can change at the drop of a hat. Something similar is playing out in Zomato, as global investment bank Jefferies can’t quite make up its mind on the stock.
Last week, Christopher Wood, Global Head of Equities at Jefferies, included Zomato to two of his long-only portfolios, assigning a weight of 4 percent each. This comes just a few months after Jefferies removed the stock from its model India portfolio. Interestingly, that ouster too came within a few months after the money manager had sung paeans for the stock.
These moves have all the makings of a three-episode mini-series, possibly titled The House of Contradictions.
Episode 1
The story started in July last year when Zomato shares were getting hammered following the expiry of the lock-in period for investors in its initial public offering (IPO), following Jefferies coming out with a report titled ‘Night is darkest just before the dawn’. In that report, analysts had given the stock a high-conviction ‘buy’ call with a target price of Rs 100, when the stock had lost 67 percent from its listing price (and much, much, more from the peak), to trade at around Rs 42.
The report resulted in a meme-fest and investors (and trolls) on social media bashed the call. Why wouldn’t they? They had lost money with the stock value down by as much as 75 percent from the peak. The wounds were fresh.
This was followed by another report, in the same month, titled ‘Fear has overshadowed greed’, in which Jefferies backed its earlier call terming it a ‘High Conviction BUY’ and defended its call.
Episode 2
The second episode started in December, five months after Jefferies had strongly backed the food-tech company. At this juncture, its equity strategy team made an about-turn and removed Zomato from their India Model Portfolio, surprising everyone.
“For the latter tactical move (exiting Zomato), we are incrementally wary of a potential rise in competitive activity in the sector… as its chief competitor, Swiggy, has recently seen market share loss,” Mahesh Nandurkar and Abhinav Sinha then wrote.
It had taken just five months from Zomato being a ‘High Conviction BUY’ to not finding a place in its portfolio.
Episode 3
The third episode started last week. In another about-turn, Wood, who is very vocal about his confidence in consumption-led market return from Indian equities, added Zomato to the India long-only portfolio, replacing HDFC Life Insurance, without giving an explanation for the move, which is rare. The stock found a place in his global long-only equity portfolio with similar weight, paid for by shaving the investments in JD.com and Alibaba. Wood usually substantiates his moves with a solid rationale.
He did explain his move in his next newsletter on June 1. However, it left a lot to be desired. He wrote, “GREED & fear included the stock in the India and Asia ex-Japan long-only portfolios last week. Probably the best argument for it is its market capitalisation of $7.1 billion compared with the $90-billion market capitalisation of Meituan, its nearest equivalent in China.”
It is safe to assume that he is referring to a much larger opportunity for Zomato in India, and the possibility of market cap expansion. Moreover, the company has started to focus on getting profitable, and efforts are showing results. In fact, signs of profitability were visible in December as well, when Jefferies’ equity strategy team exited the stock.
Zomato, last month, said its business, excluding quick commerce, turned adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) positive in the March quarter, driven by the food delivery business generating Rs 78 crore of EBITDA. Zomato added that it plans to get positive adjusted EBITDA and profit after tax (PAT) on a consolidated basis including quick commerce in the next four quarters.
Nonetheless, some of the concerns that the Jefferies’ team raised in December are still valid. Add to that, the industry has been facing a slowdown in the last two quarters. Zomato also shut shop in over 200 cities to make itself leaner.
Incidentally, the risk for Zomato is a bit higher at this juncture, considering how the Open Network for Digital Commerce (ONDC) is gaining a foothold. The Jefferies’ India team maintains that ONDC is not particularly disastrous for Zomato even though it is clearly an attempt to democratise e-commerce and guard against monopolistic power.
“It is likely to be either a complete flop or a massive hit,” said Wood, agreeing with his Indian colleagues. Though he argues that if it is the former, i.e. a flop, it clearly represents no threat to e-commerce incumbents. Whereas if it is the latter, it represents a win-win for everyone involved since only 6 percent of the population currently transact online, and so the addressable market will soar, he adds, though however contradictory it may sound to a layman.
Heads I win, tails you lose!
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