Zomato shares opened higher on January 2 as international brokerage CLSA stays bullish on the stock after the food delivery major raised its mandatory platform fee, charged from users, from Rs 3 to Rs 4 in its key markets.
According to analysts at CLSA, the 33 percent platform fee hike would partially offset the impact of GST on delivery charges. The brokerage has a 'buy' call on the stock with a target price of Rs 168 per share.
At 9:17 am shares of Zomato Zwere trading 2.6 percent higher at Rs 127.75 on the National Stock Exchange (NSE). In the previous session, the stock ended 0.4 percent higher at Rs 124.25 on the National Stock Exchange (NSE).
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In August 2023, Zomato introduced a Rs 2 platform fee back when it looked to improve its margins and become profitable. The company subsequently increased the fee to Rs 3 before raising it again on January 1 to Rs 4. It temporarily hiked the platform fee to Rs 9 on December 31.
This has been one of the ways to improve profitability for Zomato - apart from ad revenue, delivery charges, and higher commission from restaurants - as margin levers, according to Karan Taurani of Elara Capital.
Zomato does about 85-90 crore orders annually. An increase in each Re 1 convenience fee will lead to a positive impact of Rs 85-90 crore on EBITDA, which is around a 5 percent positive impact on EBITDA, he said. However, this hike is effective only in 33 percent of the cities, and hence the positive impact on EBITDA will be a mere 2 percent.
"We have already factored a strong margin expansion for Zomato, as EBITDA CAGR from FY24-26 is 40 percent (Ex ESOPS) and take rates are expected to see a rise from 19 percent currently towards 20.2 percent over the next one year," Taurani said.
Constant increases in delivery/platform fees may enable lower growth rates for order volume. "The only risk in our view is that Zomato will need to monitor the potential impact of this on order volume growth," The brokerage noted as it maintained a positive stance in the stock with a 'buy' rating and target price of Rs 150.
The new fee, which is effective starting January 1, comes at a time when Zomato witnessed an unprecedented surge in order volumes on New Year’s Eve.
The platform fee is levied on all customers, regardless of whether they are part of the company’s loyalty programme Zomato Gold, which provides benefits such as free deliveries and increased discounts. “It is a small fee to make our economics better and viable in the long run," said Zomato’s chief financial officer, Akshant Goyal.
"We make sure we keep our service affordable for our customers at all times," Goyal had said to shareholders while announcing the company’s financial results for the quarter ended September 2023.
Also read | Food Fight: Zomato may be looking at minimum 3 yrs of litigation over Rs 400 crore GST notice, say experts
In the last six months, the Zomato stock has jumped over 64 percent, outperforming the benchmark Nifty 50 which has risen around 12 percent in this period. The multibagger stock has doubled investors' money in the past year, rising over 106 percent.
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