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Zomato losses widened in Q2 but analysts project up to 60% upside

November 11, 2021 05:32 PM

Zomato losses widened in Q2 but analysts project up to 60% upside
Recently, Zomato announced the acquisition of a 6.4 per cent stake in Curefit for $100 million, an 8 per cent stake in Shiprocket for $75 million and a 16 per cent stake in Magicpin for $50 million.

NEW DELHI: Zomato NSE 3.56 % reporting a widening of losses in the September quarter has failed to dent analysts’ targets on the stock. If anything, analysts say the stock is inexpensive. Some see it going up to RS 220, suggesting up to 60 per cent potential upside

Foreign brokerage Morgan Stanley has upgraded the stock to overweight from equal-weight, raising its target to RS 185 from RS 140. It sees accelerating in core business and doubling down on investments despite losses as positives. The brokerage expects Zomato to break even in FY25, and has revised its revenue forecast by 14-20 per cent for FY22-24.

Goldman Sachs has a target of RS 185 on the stock as it believes Q2 beat was driven by strong user acquisition. It sees elevated cash burn in the near term, as the focus of the firm remains on user acquisition. Macquarie has a target of RS 183, while Jefferies finds the stock worthy of reaching RS 170.

The online food delivery platform reported a net loss of RS 434.9 crore in the September quarter, mainly on account of investments to grow its business. The company had reported a loss of RS 229.8 crore in the year-ago quarter. The losses went up due to three reasons: increased spending on branding and marketing for customer acquisition; increased investments and growing share of smaller/emerging geographies in the company’s business and increased delivery costs due to unpredictable weather and increase in fuel prices, the company said. Revenues rose 140 per cent YoY aided by food delivery GOV (gross order value) growth of 158 per cent, which was led by an increase in monthly transacting users or MTUs (up 158 per cent YoY), active food delivery restaurants and active delivery partners. Contribution margin as percentage of GOV was 1.2 per cent in the September quarter against 2.8 per cent in the June quarter.

ICICI Securities says it liked some of Zomato’s priorities. “What caught our attention is the ambition of creating a $10-billion revenue business (vs $266 million revenue in FY21) in a ‘few years’ time and Alibaba, Tencent and Info Edge-like aspiration of taking the investment route to build the hyperlocal ecommerce ecosystem. While this is easier said than done, resisting the temptation of venturing into unrelated businesses is the key to long-term shareholder value creation, in our view.”

Also Read : Zomato wants to do an Info Edge, scouts for investments in startups

Recently, Zomato announced the acquisition of a 6.4 per cent stake in Curefit for $100 million, an 8 per cent stake in Shiprocket for $75 million and a 16 per cent stake in Magicpin for $50 million. The alignment of these three entities with the strategic priorities of Zomato and the synergy potential needs to be seen, analysts said, adding that Zomato is planning to deploy another $1 billion from the IPO proceeds over the next 1-2 years.

“Zomato is way cheaper vs median food services (1.9 times), technology (1.8 times) or consumer (2.9 times) stocks. We value it at 55 times FY25 P/E, in-line with median consumer discretionary multiple. Upside risk to our estimates and target multiple is likely as discounts turn out to be lower against our base case and the company scales up in attractive adjacencies,” ICICI Securities, says, suggesting a target of RS 220.

Kotak says the restaurant take rate of 15.8 per cent and delivery take rate of 7.3 per cent is healthy and in line with past performance. The hyperpure business scaled up rapidly (up 49 per cent QOQ), it says, adding that revenues from other dine-out services were tepid and a drag on profitability. “Strategic focus remains on core business growth; M&A will drive entry into hyperlocal businesses. Higher near-term growth gets negated by higher losses driving a revised fair value of RS 170 from earlier RS 175,” it adds.

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