Shinier Zomato Gold, better commissions makes analysts bullish in the long term

• Refreshed Zomato Gold plans place the company in a better position against rival Swiggy as it seeks to gain more market share.
  
• Despite the near-term headwinds like the return of dine-out, and a slowdown in discretionary consumption, analysts maintained a positive outlook on the food delivery segment in the medium-to-long term.
  
• Market share gains thanks to an aggressively-priced loyalty programme and Blinkit help support the bullish outlook on Zomato, according to HSBC analysts.
  

Zomato’s stock has been under the pump in 2023, declining by over 12% while the benchmark Nifty50 index has fallen less than 6% so far. However, the analysts at HSBC Global Research think that the markets are undervaluing the longer term prospects of the company as well as the food delivery business overall.

Now, with the relaunched Gold plans and Zomato’s push for higher take-rates from its restaurant partners has made analysts bullish on the company as the food delivery industry works towards becoming profitable. Take-rate is the commission that Zomato charges to its restaurant partners.

Return of the dine-out eats into food delivery

One of the reasons behind the most recent slump in the Zomato stock is a slowdown in its core business of food delivery. In its December quarter results, the company’s CEO Deepinder Goyal underlined that this is not unique to just Zomato, but an industry-wide trend due to the return of dine-out.

“We assume the hyper-growth expectations of the [Dalal] Street have now been suppressed, although current muted growth is likely undershooting the long-term trend,” said a report by HSBC Global, led by analysts Yogesh Aggarwal and Abhishek Pathak.

In the near term, the analysts at HSBC expect the gross order value to grow at 9% year-on-year, significantly lower than their previous expectations of 15% growth. In the longer term (two to five years), though, it expects the food delivery segment as a whole to deliver 10-15% compounded annual growth rate (CAGR) due to an improvement in order frequency.

Analysts at Kotak Institutional Equities are relatively more optimistic with expectations of nearly 25% YoY growth in GOV in FY23.

Slowdown in discretionary spendings another headwind

Another headwind slowing down food delivery is the slump in discretionary spending due to elevated food inflation. “March 2023 quarter thus, may fail to excite as inflationary pressures, seasonally weak demand (low festival days) and lower number of days in the quarter all play on food delivery demand,” the Kotak report added.

According to the analysts at ICICI Securities, discounting could make a comeback in a bear case scenario where discretionary consumption continues to fall. However, that would lead to a de-rating for the food delivery segment as a whole, with Zomato and Swiggy both being forced to keep their profitability plans on the back burner.

Clawing back with a refreshed and aggressive loyalty programme

The analyst consensus is that the refreshed Zomato Gold loyalty programme with tweaked plans should help the company regain some of its market share, even though it may hurt margins in the near term.


In January, Zomato relaunched Gold at an introductory price of ₹149 for three months, in contrast with the comparable Swiggy One plan which costs ₹399.

HSBC analysts now expect Zomato to increase its market share to 57% by FY24 from the existing 54%. Since FY20, Zomato has aggressively increased its market share from 44% to 54%, and the new Zomato Gold plans could add more juice, placing the company on a much stronger footing as it works towards profitability.

In the short-term, though, the refreshed Zomato Gold plans could dilute margins, but HSBC analysts expect Zomato’s push for higher take-rates to offset some of the impact – the research firm expects Zomato’s take rate to increase from the existing 17.2% to 18.5% in the March 2023 quarter.

Blinkit ‘under-appreciated’

Zomato’s Blinkit ₹4,447 crore acquisition has been under the scanner for different reasons, including delaying the company’s push for profitability.

However, analysts at HSBC maintained their bullish outlook, stressing that hyperlocal quick commerce will deliver strong growth – they expect Blinkit’s gross order value to double to $2 billion in FY25, from the existing $1 billion.

“With increasing volumes we see the potential for quite an improvement in profitability as well,” the HSBC report added, stating that optimisations in terms of technology and logistics can help improve overall profitability.

Analysts at HSBC and Kotak Institutional Equities maintained their bullish outlook, expecting an upside between 54% to 64% from the current market price of ₹53 per share.

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