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Business News/ Markets / Stock Markets/  As Zomato share price surpasses 100 level, analysts turn cautious on ‘unjustifiable’ valuations
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As Zomato share price surpasses ₹100 level, analysts turn cautious on ‘unjustifiable’ valuations

Zomato’s core food delivery business which was in a slowdown mode in H2FY23, returned to strong growth in Q1FY24 at 11% QoQ versus Nomura’s expectation of 9.2% growth and high-single-digit guidance.

Zomato shares were able to surpass ₹100 for the first time since January 25, 2022.Premium
Zomato shares were able to surpass 100 for the first time since January 25, 2022.

Zomato share price extended rally to jump more than 7% on Monday after the food delivery platform surprised the street with its first ever net profit in the June quarter of FY24. Zomato share price jumped as much as 7.77% to hit a 52-week high of 102.85 apiece on the BSE.

Zomato shares were able to surpass 100 for the first time since January 25, 2022.

However, analysts believe Zomato share price rally was largely led by the euphoria over the Q1 results with the narrative becoming positive in the market. 

“Zomato share price is seeing the rally on the back of euphoria around better Q1 results. However, the company still has a long way to go to become EBITDA positive. All the positives have been factored in by the current share price for the near term. Hence, we may see profit booking in Zomato share price going ahead after this rally," said Avinash Gorakshakar, Director Research, Profitmart Securities.

Gorakshakar believes Zomato share valuations are still very high and does not make sense at these prices. 

Also Read: Why Zomato Share Price is Rising Today

Reiterating similar views, Sudip Bandyopadhyay, Group Chairman of Inditrade Capital, said that he would remain cautious on Zomato share price at these levels.

“The company is on the right direction and has delivered a small net profit. However, we would remain cautions as the financials do not justify the current valuations," Bandyopadhyay said.

On August 3, Zomato reported its first ever net profit of 2 crore for Q1FY24, beating its own estimate, as against a loss of 186 crore, YoY. The revenue of the company during the quarter rose to 2,416 crore from 1,414 crore, in the year-ago period.

Zomato’s core food delivery business which was in a slowdown mode in H2FY23, returned to strong growth in Q1FY24 at 11% QoQ versus Nomura’s expectation of 9.2% growth and high-single-digit guidance.

The growth was led by seasonal factors like the summer holiday season for schools and the IPL cricket tournament. 

Monthly transacting users (MTUs) increased by around 5.4% QoQ to 17.5 million users, up 4% YoY, aided by the marketing push of Zomato Gold, in Nomura’s view. 

Also Read: Zomato Q1 Results: At 2 crore, food delivery platform reports net profit for the first time

Zomato noted that its food delivery business could grow ~25-30% over the next two years leading to continued improvement of contribution margin (CM) and adjusted EBITDA margin.

Nomura estimates its core food delivery business to register ~20% CAGR over FY24-25, with a CM of 7-7.5%. 

“While we acknowledge that Zomato is likely to achieve its target of 4-5% EBITDA margin (as a % of GOV) earlier than our expectation, we continue to believe that it will be a challenge to achieve double-digit CM, with high growth in the long term," Nomura said.

Nomura has a ‘Reduce’ rating on Zomato with a target price of 60 per share, implying a 41.6% downside from Monday's high price.

Also Read: Zomato Q1 results cheer investors: Many brokerages stay positive, but can it sustain high growth?

Meanwhile, analysts at domestic brokerage firm Motilal Oswal Financial Services see the strong all-round performance from Zomato as an indicator of an accommodative competitive environment in both food delivery and quick commerce verticals. 

They believe the food delivery business is still in a nascent stage in India with a long runway for growth. With a dominant market share and strong growth in the food delivery business and Hyperpure, they expect Zomato to report a strong 43% adjusted revenue CAGR over FY23-25.  

Motilal Oswal now estimates Zomato to turn positive on reported EBITDA by Q4FY24, and deliver around 5% EBITDA margin in FY25, which should further drive profitability.

Motilal Oswal has ‘Buy’ rating on the stock with a target price of 110 per share.

At 12:35 pm, Zomato shares were trading 5.56% higher at 100.74 apiece on the BSE.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 07 Aug 2023, 12:51 PM IST
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