Analysts upbeat on Zomato’s profitability after company beats Q4 estimates

• Analysts say that the positive guidance by Zomato’s management will aid in the recovery of the company’s battered share price.
• The hope of profitability has led to brokerage houses recommending a ‘Buy’ rating on the stock with an upside of 29-69% from current market price.
• Zomato’s consolidated net loss narrowed to about ₹188 crore in the March quarter from a loss of ₹360 crore last year.

Analysts are bullish on Zomato after the online food delivery platform, on Friday, posted better-than-expected March-quarter results and guided for profitability in the next six quarters. Shares of the company rose as much as 4% on Monday before reversing most of its gains.

Zomato’s consolidated net loss narrowed to about ₹188 crore in the March quarter, from a loss of ₹360 crore last year, and much better than the estimates for a loss of ₹356 crore. Zomato’s consolidated revenue jumped 70% on year to ₹2,056 crore.

Moreover, Zomato’s management has said it expects to turn EBITDA (earnings before interest, taxes, depreciation, and amortisation) positive by Q4 FY24, and is eyeing net profitability by Q2 FY25.

Analysts say that the positive guidance by the company will aid in the revival of the company’s battered share price.

“...the company has guided for high-single-digit sequential growth for the business in 1QFY24. We believe continuity in these trends along with management commitment to profitability improvement can lead to significant upside from CMP (current market price). Zomato is our top pick in the listed Internet space due to our conviction on its long-term growth prospects and the management’s strong execution capabilities,” said analysts at JM Financial.

The hope of profitability has led to brokerage houses recommending a ‘Buy’ rating on the stock with target prices representing an upside of 29-69% from the current market price. On Monday the shares closed down 3.4% at₹62.30.

Well-positioned to benefit from robust industry tailwinds

The rise in delivery costs to ₹57 currently from ₹52 in FY20 has also aided margins. Analysts believe Zomato may increase customer delivery charges further.

Besides, employee costs for Zomato are also expected to slow as the layoff of 3% of staff, including many senior leaders, announced last November will add to savings in employee costs.

“We continue to remain bullish on the company’s long-term growth 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,” said a report by JM Financial.

Zomato’s quick-commerce arm Blinkit is among the top players in the space with analysts expecting the space to become a duopoly of Blinkit and Instamart in the coming years.

“Many small and large companies are still competing to grow in this space, with the biggest among them being Blinkit, followed by Swiggy's Instamart and Zepto. We believe that in the next couple of years, this will also become a duopoly, with Zomato-backed Blinkit and Swiggy-backed Instamart dominating this market as well,” said a report by Nuvama Institutional Equities.

The cherry on the cake is ONDC (Open Network for Digital Commerce) may not turn out to be much of a hurdle for Zomato going forward.

The government’s ONDC initiative provides opportunities for small businesses to grow via e-commerce, by connecting them with network partners – taking products digitally.

“We continue to expect food delivery to remain a duopoly and see no threat from ONDC for now. We believe experience and reliability takes preference until the pricing difference is higher than 15%. With ONDC limiting incentives, the gap in pricing has narrowed to less than 10% in most cases and even higher on ONDC in some cases for Zomato Gold members,” said analysts at Nuvama.

Zomato's arch rival Swiggy declared last week that its food delivery business has become profitable, without giving any more details. As analysts remain positive on the long-term growth opportunity for Zomato, it will be interesting to see how the competition plays out in the days ahead.

$ZOMATO.NSE Looks Bullish on Chart Cup & Handle Pattern in formation Potential 16 Pts Deep Cup Breakout Point : 66 Support : 61 DCB

— (@CuriousCommunity) May 22, 2023

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