Zomato: After over 160% gains in last one year, Macquarie expects sharp downside of 47% for the stock – here’s why

Zomato faces a pessimistic outlook from Macquarie with a predicted 47% downside due to heightened competition in the quick commerce sector, despite positive EBITDA in March 2024 quarter.

Pranati Deva
First Published31 May 2024, 04:07 PM IST
Zomato faces a pessimistic outlook from Macquarie with a predicted 47% downside due to heightened competition in the quick commerce sector, despite positive EBITDA in March 2024 quarter.
Zomato faces a pessimistic outlook from Macquarie with a predicted 47% downside due to heightened competition in the quick commerce sector, despite positive EBITDA in March 2024 quarter.

Despite experiencing significant returns over the past year and achieving positive EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) in the March 2024 quarter, Zomato, the food delivery platform, faces a pessimistic outlook from global brokerage Macquarie. Contrary to the bullish sentiment of other brokerages, Macquarie predicts a substantial 47 percent downside for the company in the next 12 months. This bearish projection is attributed to heightened competition within the quick commerce sector, posing challenges for the food delivery platform.

The brokerage reiterated its "underperform" call on the stock, with a target price of 96, implying a potential downside of 47 percent from Thursday's close of 180.60.

The escalating competitive landscape primarily influences the bearish target set by the global brokerage, as numerous e-commerce platforms venture into the quick commerce sector. The brokerage notes that several e-retailers are displaying renewed ambitions in quick commerce, although it acknowledges Blinkit as an efficient operator in this space. Despite the substantial potential Total Addressable Market (TAM) of India's retail sector, the brokerage maintains a pessimistic view on consensus estimates due to the increasing competitive pressure.

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Macquarie had maintained its 'underperform' rating on Zomato since May of the previous year when it downgraded the stock from its earlier 'neutral' recommendation.

As per the brokerage, the primary driver of their caution is the impending launch of JioMart's 30-minute grocery delivery service in multiple cities, commencing next month, and further expansion plans. Reliance Industries' JioMart aims to roll out its 30-minute grocery delivery service initially in eight cities, with subsequent expansion into the top 20-30 cities across the nation in the first phase.

Additionally, Macquarie anticipates a downside to both consensus forecasts and margins for Blinkit.

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Post Macquarie's report, the stock shed as much as 5.1 percent to its day's low of 171.25. Currently, it is over 17 percent away from its 52-week high of 207.30, hit earlier this month while it has still soared over 153 percent from its 52-week low of 67.61, hit on June 1, 2023.

The scrip has surged 162 percent in the last 1 year and 44 percent in 2024 YTD, giving positive returns in 4 of the 5 months so far. It fell 7.7 percent in May so far, snapping after 13 straight months of gains since March 2023. Between March 2023 and April 2024, the stock had skyrocketed 279 percent. This year, it rose 6 percent in April, 10 percent in March, 18.5 percent in February and 13 percent in January.

Meanwhile, on the back of an exceptional performance, multiple other brokerages including Goldman Sachs and Motilal Oswal have a positive outlook on Zomato.

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In the March quarter of FY24 (Q4FY24), the food delivery platform showcased significant growth, reporting a consolidated net profit of 175 crore, marking a notable turnaround from a loss of 188 crore in the corresponding period the previous year. This represents a 27 percent increase from the 138 crore net profit posted in the December quarter.

Zomato's revenue from operations in Q4FY24 also surged 73 percent to 3,562 crore from 2,056 crore year-on-year (YoY). The Gross Order Value (GOV) for the March quarter witnessed robust growth across B2C businesses, soaring by 51 percent YoY to 13,536 crore.

Operating at an improved level, the company recorded an EBITDA of 86 crore, showcasing a positive shift from the loss of 226 crore incurred during the same period last year. Notably, Zomato's quick commerce arm, Blinkit, achieved operational EBITDA break-even in March 2024.

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Most analysts have upheld their bullish outlook on Zomato shares post its March quarter earnings, with some even revising their target price upward, primarily driven by the sustained outperformance of Blinkit.

Goldman Sachs had reaffirmed its Buy rating on Zomato while revising the target price upwards to 240 (33 percent upside) from the previous 170. The primary driver behind this upward revision is the promising growth potential of Zomato's quick commerce subsidiary, Blinkit. According to analysts at Goldman Sachs, the inferred value of Blinkit, the grocery delivery platform acquired by Zomato in 2022, now exceeds that of Zomato's core food delivery division.

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Goldman Sachs further anticipates that Blinkit is poised for a compounded annual growth rate (CAGR) of 53 percent in its Gross Order Value from fiscal years 2024 to 2027. This robust growth trajectory is expected to drive a 32 percent adjusted revenue CAGR for Zomato on a consolidated basis over the same period.

Motilal Oswal also maintains a positive stance on Zomato's long-term growth prospects and does not anticipate a further intensification of competition despite the entry of ONDC into the space. Zomato has reaffirmed Blinkit's guidance for achieving Adj. EBITDA break-even by Q1FY25. Projections indicate Zomato is poised to deliver robust year-on-year growth of 70 percent and 41 percent in FY24 and FY25, respectively. Notably, Blinkit is expected to outpace the food delivery business, driven by geographical expansion, enhanced order frequency, and a moderated competitive landscape in the quick commerce sector.

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Following a shift to positive margins in Q3, MOSL now forecasts Zomato to achieve EBITDA margins of 4.5 percent and 10 percent in FY25E and FY26, respectively. Emphasising the nascent stage of the food delivery industry in India, MOSL envisions substantial growth opportunities ahead. With Zomato's dominant market share and robust performance in the food delivery and Hyperpure segments, MOSL anticipates a strong 38 percent Adj. revenue CAGR over FY24-26.

 

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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First Published:31 May 2024, 04:07 PM IST
HomeMarketsStock MarketsZomato: After over 160% gains in last one year, Macquarie expects sharp downside of 47% for the stock – here’s why

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