Zomato shares at attractive levels, says Jefferies, sees stock to almost double

The meltdown in tech names has been weighing on food delivery stocks like Zomato that has fallen over 25% in the last five trading sessions. Growth contrast through pandemic shows interesting trend for Zomato vs peers, as per Jefferies. 

Concerns are rising on Fed tightening, which has been weighing on the profitless tech names. “We have already seen FANGMAN stocks down 10-30% in past 1M, with Nasdaq down 14% from its recent highs. The concerns are also reflected in the global food delivery names which have also corrected 30-60% from peak. Zomato too has corrected around 40% from the peak, reflecting the concerns on rising cost of capital,” the note stated.

The brokerage sees a case for India premium to sustain, as seen in other sectors, although short-listing history makes this difficult. On its current forecasts, ascribing 1-1.5x of delivery GMV (keeping other parts constant), ₹70-95 appear to be attractive levels. Jefferies' base case price target is unchanged at Rs175, at least for now, with upside scenario price target of ₹240 and downside scenario of ₹70.

Despite the share price correction, Jefferies believes that the fundamental growth story remains intact, and expects Zomato to steadily gain share in the overall food services market. Interestingly, the food services opportunity is itself quite attractive, driven by macro factors which also augur well for the delivery platforms, it highlighted.

“Despite the correction, Zomato's valuation premium stays high compared to the global peers, given all-round correction. While it is difficult to forecast where this settles, we expect premium valuation to sustain given long runway for growth for food services, share gains by delivery platforms, market structure (two player market) etc. The debate remains on what the right premium is and that is a key challenge for us, given the short-listing history,” the note further added.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.