Fintech giant Zomato traded on a bullish note on Monday despite a brokerage trimming its growth estimates for the company's food delivery segment over FY23-27 financial years. JM Financial's latest note revealed that their channel checks suggest food delivery GOV is likely to remain muted sequentially in Q4, which will be for the third consecutive time. However, the brokerage still maintains 'Buy' on the stock and has set a target price of ₹100.
At the time of writing, Zomato's stock traded at ₹53.94 apiece up by 3.47% on BSE. The stock has overall climbed by at least 4% with an intraday high of ₹54.20 apiece.
On the previous day, Zomato shares stood at ₹52.13 apiece.
Zomato shares are on a gaining spree for the second consecutive day.
In its latest research note, JM Financial said, "Our recent channel checks suggest sequential food delivery GOV growth is likely to remain muted for the third consecutive time in Mar-Q."
Key factors that are affecting growth as per the brokerage include --- continued inflationary pressures, the growing share of dining-out, and focus on profitability improvement (to support growth investments in adjacencies such as Blinkit and Hyperpure). Notably, the relaunch of the ‘Gold’ loyalty membership and closure of operations in 225 cities suggests the company sees high long-term value creation potential by mining high-quality customers (those whose ordering frequency is very high), rather than investing in expanding the long-tail of customers ordering infrequently.
JM Financial's note added, "while on the one hand, this strategy could have an adverse impact on the near-term MTU trend (amidst weak macros), on the other hand, it could accelerate profitability expansion. Recent developments also suggest 1) improvement in restaurant take-rates, and 2) decline in delivery cost could be much better than earlier anticipated, leading to accelerated profitability."
Thereby, the brokerage said, "While we now forecast Zomato’s food delivery segment to grow at a CAGR of c.21% over FY23-27 vs. the earlier estimate of ~25%, contribution margin (as % of GOV) could reach ~7% by FY27 versus FY34 expected earlier."
However, despite lowering food delivery growth estimates in Zomato, JM Financial believes that the company remains a long-term story.
It added, "We continue to remain bullish on the company’s long-term prospects in the hyperlocal delivery space as we believe it is well positioned to benefit from robust industry tailwinds such as improving tech penetration and rising income share of digitally native millennials / GenZ. Balance sheet also remains robust with net cash of ₹113 billion as of Dec’22."
That being said, on valuation, the brokerage added, "We continue to value the consolidated business using a 15-year DCF (WACC of 13% and Tg of 6%) to arrive at a Dec’23 FV for Zomato of ₹100."
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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