ONDC not significant near-term threat for Zomato, says Kotak Equities
- The brokerage said it only saw a limited impact of ONDC on Zomato in the near term
The shares of Zomato was trading low today and have been under pressure that Open Network Digital Commerce (ONDC) could become a strong competitor to the food delivery services platforms. However, brokerage firm Kotak Institutional Equities in its recent report said that there would only be a limited impact of ONDC on Zomato in the near term.
The brokerage said that cost of ordering food on ONDC is lower due to ONDC-funded discounts, which may not sustain. It said that the variable cost of running food delivery business is lower for hyper scaled up platforms like Zomato as compared to a smaller player.
"Recent media reports have indicated that ONDC is processing 25,000 orders per day, a significant ramp-up from nil earlier in the year. The cost of ordering food on ONDC, at least in some cases, seems to be lower than on Zomato/Swiggy, though this is largely on account of ONDC-funded discounts, which may not sustain," Kotak said in a report.
“The variable cost of running the food delivery business is lower on a scaled-up platform such as Zomato versus a smaller player. This implies that a new player would have to contend with higher costs unless it chooses not to invest in customer support, which may impact customer retention,” it added.
The brokerage said it only saw a “limited impact of ONDC on Zomato in the near term; the long-term impact is, for now, tough to call."
Brokerage firm Kotak Institutional Equities has a ‘buy’ rating on Zomato with an target price of ₹82, i.e., an upside potential of 29 per cent from the current market price of ₹63.4.
“In the near term, Zomato’s larger scale, cost competitiveness and reasonable margin profile may leave it relatively unscathed from ONDC. Given the dynamic nature of the industry, the long-term impact of ONDC, for now, is unclear,” said Kotak Equities.
In its report, brokerage said that Zomato had 330,000 average active monthly riders in 3QFY23, significantly more than aggregators such as Shadowfax and Dunzo. The cost of delivery per order is heavily dependent on orders per day delivered by a rider
“We believe Zomato will score better on this metric than peers on account of the larger size of its network. Further, the time taken to deliver food is an important metric. We believe third-party aggregators have the capabilities to do well in the 60-120 min delivery window, but would falter in the 30-45 min delivery window, in which Zomato operates given the many-to-many delivery mode,” it said.
The brokerage has pegged Zomato’s variable cost of delivery at Rs75 per order for FY2023. This includes Rs57 in delivery costs and Rs18 of other expenses.
“Over time, Zomato has significantly reduced incentives/discounts, and thus a significant part of other expenses is customer and restaurant appeasement expense,” it said.
On Tuesday, the company's scrip ended 1.19 per cent down at ₹62.92. On a year-to-date basis the stock has risen by 4.43 per cent.
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