Home / Markets / Stock Markets /  Zomato shares: Why Emkay sees over 50% rally from current level

Zomato’s strong market position, brand recall, expanding TAM with Hyperpure and Blinkit, and anticipated turnaround in profitability will lead to a 40% revenue CAGR and positive net profit in the next four years, said Emkay in a note. 

The brokerage and research firm has initiated coverage on Zomato shares with a Buy rating and a target price of 90, implying a potential upside of over 50% from current level. The brokerage said it has not factored in any value accretion from Blinkit, considering uncertain timelines on unit economics turnaround and intense competitive intensity. Management’s guidance of $320 mn investment through breakeven would limit the cash burn.

Though, key risks, as per Emkay could be slower-than-expected turnaround in profitability because of AOV decline and/or regulatory changes; poor capital allocation; and higher competitive intensity in quick commerce.

“We expect India’s online food delivery (OFD) market to grow ~7x over the next decade, led by an increase in per capita income, online penetration/availability, eating out habit or behavior, and women labor force participation. Zomato’s path to profitability and future value creation and, therefore, the investment case primarily rest on continuation of the duopoly market structure, supported by inherent network effects, with Zomato maintaining around 50% market share," the note stated.

The brokerage expects OFD companies to capitalize on captive customers and exploit ‘adjacencies’ like hyper local delivery and believes Zomato’s high market share (and losses so far) in the OFD market leaves little to be exploited by competition. “We believe Zomato’s ~50% market share in the rapidly expanding OFD market is a moat; expansion into adjacencies will further expand TAM and potentially drive more efficiency gains."

It forecasts contribution margins to likely improve by 340bps to 5.1% through FY25, as take rate dispersion reduces and delivery subsidies abate. "Zomato could earn ~$1.5bn in profit in FY35 with high ROCE and potentially command a market cap of ~$70bn, if one applies one-year forward P/E multiple of 50x (similar to consumer discretionary and restaurant peers currently trading at median P/E of 65x), and, thus, potentially generate a ~20% CAGR return.

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

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