Zomato ‘Buy’ call: Jefferies responds with 'high-conviction' to investor concerns and memefest!

Also read: House of cards: Likes of Zomato, Paytm have eroded Rs 3 trillion from peak valuations

The brokerage said that concerns do persist on the QC entry with Blinkit buy and timing of the acquisition, though “97% shareholders voted in favour”. The analysts added that “organic foray was not an option as Zomato was already late”.

“On timing, while delay may have brought down Blinkit valuation, this would have also led to a business deterioration (curtailed ops, poor service levels). Even in the food delivery, Zomato had successfully acquired Runnr (delivery fleet) and Uber Eats in the past. Of course, we do share the concerns on QC foray itself, which is not very different from say Nykaa's fashion/B2B foray (or ITC's FMCG foray two decades back). We also believe dilution may not have changed much for Zomato shareholders as correction in valuations led by macro concerns impacts both,” said the report.

On the stagnation of MTU at 15-16 million in the past three quarters, and if the affordability ceiling has been hit, the brokerage said that conversion from ATU itself would provide some headroom to drive MTU growth in the medium term. Therefore, the company may not need to spend significantly on customer acquisition cost (CAC). “While mgmt. does not share data on cohorts, we note that 50m ATUs order <1x a month. Against this, top cohort (1.8m users) orders >4x a month, forms c.4% of ATUs but contribute well over 20% to GOV,” said the report.

Profitability of food-delivery will go up with higher acceptance among customers for this service, and with the ability of the foodtech platform to charge restaurants and customers going up. “Duopoly industry structure should also help as Swiggy would also like to focus on profitability given the current context. Interactions with restaurants indicate Zomato has also been raising take-rates for past contracts and bringing it closer to current levels, which should help. In addition, we see lower subsidies & discounts, going ahead and continue to model Ebitda break-even by end-FY25,” said the report.

The brokerage does not see any need for capital raising, with minimal capex and working capital needs and a net cash of Rs 120 billion in the medium term. “Zomato reported 4Q Ebitda loss at Rs2.2bn and Blinkit had a monthly Ebitda loss of Rs1.1bn in May-22. Put together, even if we assume no improvement, full year Ebitda loss annualises at Rs22bn,” they said.

Elaborating on its high-conviction buy call, the brokerage said, “The sharp correction in share price has pulled down valuations to 0.6x 1Y forward EV/GMV and 2.4x EV/Revenue. Premium to global & regional tech names has gone down, and we see value emerging in Zomato at current level - High Conviction BUY. We believe that stock already ascribes a zero to even negative value to Blinkit at different levels of assumptions on base business.”