zomato share price: Risk-reward not compelling enough, ICICI Securities maintains ‘hold’ on Zomato – Blue Barrows

stock has corrected by over 54% in the last one year, on a year-to-date basis and given this significant derating, domestic brokerage house has maintained a ‘hold’ on it with a target price of Rs 65. This signals a limited upside potential of over 4% from the current market price.

Amid uncertainties about the Blinkit merger and its likely impact on the food aggregators’ profitability, the brokerage has maintained a ‘hold’ call on the new-age stock. Notably, the stock, as of now, is trading at a discount of over 18% from its IPO issue price of Rs 76 per share.

The brokerage maintained that even though the company is guided for attaining EBITDA-breakeven in the first quarter of FY24, the same shall involve a very careful calibration of employee expenses and marketing spends. “We estimate an EBITDA margin of -1.3% for FY24E,” added the brokerage.

ICICI Securities sees the company’s Hyperpure business or its B2B e-commerce vertical to benefit from growth in the overall segment. The total addressable market (TAM) of the company as of FY23E is around$25 billion and this shall increase very sharply given the pace at which digital penetration is picking up.

“We believe B2B e-commerce is poised for a CAGR of ~55.8% over FY23-FY25E. Zomato’s Hyperpure business could benefit from this trend, especially given its existing commercial relationships with ~208k restaurants across the country and synergistic sourcing opportunities with Blinkit,” added the brokerage.

The brokerage also sees the underlying metrics of the company’s food business to log steady improvement and this, as per the brokerage, “has resulted in the food delivery business’s contribution as a percentage of gross order value (GOV-reported) improving from 1.1% to 2.8% during the same period. Consequently, Zomato reported EBITDA breakeven in Q1FY23 for the food delivery business. While all of these are positive developments, we think the stock is likely to remain range-bound given the uncertainties around the path to profitability for Blinkit,” added the brokerage.

All in all, the brokerage sees improvement in order frequency and delivery fees, enhanced take-rates and hyperpure growth acceleration to be the key revenue drivers for Zomato.

On a YTD basis, the stock has corrected by over 54%. But as per the brokerage, the stock is still trading at a premium to most of its global peers (~7x CY22E EV/Sales vs ~4.2x global average). The brokerage re-initiates coverage on the stock with a ‘hold’ rating and arrived at a DCF-based target price of Rs 65 on the basis of 12.5% WACC and 5% terminal growth assumptions. “At current valuations, we believe risk reward is evenly balanced,” added the brokerage.

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