Zomato stock increased by about 1% on Wednesday as HSBC Global Research analysts predicted it will touch 87 in the near future, representing a potential gain of 64% over the firm’s current price. Zomato has underperformed the S&P BSE Sensex with a year-to-date loss of nearly 11%. HSBC has kept its ‘Buy’ rating on the shares despite this underperformance.
Although the meal delivery sector has experienced a significant slowdown recently and may continue to do so in 4Q23, the brokerage anticipates Zomato to regain its market share. Based on our assumptions of a risk-free rate of 2%, an inflation differential of 2.5%, a beta of 1.1, and a market risk premium of 5.5%, the brokerage claimed it values Zomato using a DCF model and uses a WACC of 10.5%. (all unchanged).
“Our Blinkit projections are also included in our DCF model. Although modifications are still needed to put the medium-term growth rate predictions for the food delivery GOV closer to 10% over the longer period, which is, in our opinion, doable, the note said, “We feel consensus expectations are now a lot more realistic.
Additionally, analysts at HSBC stated that they are not excessively pessimistic about the Blinkit business and anticipate favorable surprises in GOV growth and profitability over the upcoming quarters.
Regarding reclaiming a portion of the market share
Zomato has begun to regain some of the market share it lost in 2HCY22 as a result of the introduction of Zomato Gold, according to the brokerage.
Using an aggressive go-to-market strategy, it anticipates Zomato will keep edging Swiggy for market share. “We now anticipate a growth in Zomato’s share to 57% in FY24e. Despite the loss in 2022, this would indicate that Swiggy’s market share has decreased by 13 percentage points from FY20 due to Zomato’s growth, the company stated.
“While the present modest growth is probably undershooting the long-term trend, we assume that the Street’s expectations for hyper-growth have now been stifled. We anticipate FD Gross Order Value (GOV) to expand by 9% year over year in 4QFY23, which is less than our medium-term projection of 15%, according to HSBC. Despite this being disappointing, there are a few bright spots for Zomato investors, the bank added.
EBITDA margins should maintain their upward trend in the upcoming quarters as the business absorbs the effects of Zomato Gold. The report also noted that Swiggy continued to burn through money much faster than Zomato. The industry dynamics will be more favorable for Zomato as it seeks to increase margins as the execution bias shifts in favor of profitability.
Over time, Blinkit might provide a considerable value-addition.
According to the brokerage, Blinkit’s grocery business is profitable under particular conditions of scale and organizational structure. It was claimed that the Street continues to underestimate Blinkit.
“Due to low penetration and stabilizing competition, hyperlocal/Qcommerce is likely to experience substantial growth for a few years. The current GOV run-rate for Blinkit is $1bn. The company could easily reach GOV of $2 billion in FY25e, which even at a GOV multiple of 0.5 would add $1 billion to the stock value (20 to 25 percent of its current EV). We anticipate a significant improvement in profitability with rising volumes,” it added.
Risks that are negative
1. The increase of customers who transact in FDs may be slower than anticipated.
2. Zomato’s start-up equity investments might not be profitable.
3. Hyperlocal competition may outperform Zomato and its investee startups, like Blinkit, in the supermarket and other markets.
