Zomato Shares Likely To Be Volatile In Near Term; Why Investors Should Grab This Opportunity To Buy?

Online food delivery, Zomato is among the leading new-age companies in India. However, Zomato just like every other fintech listed on stock exchanges faced volatility since listing. It was just recently when Zomato shares breached the critical Rs 100 mark on brouses due to steller Q1 earnings where the company rode to book profits. However, this glorious moment was short-lived and Zomato shares are currently below Rs 90 apiece on BSE. The volatility is likely to be in the loop for the near term in Zomato shares owing to possible exits from pre-IPO shareholders. If this is likely to happen, then brokerage JM Financial believes it is a good opportunity for investors to hold positions in Zomato shares.

In its research note dated August 18, JM Financial said, "Zomato's stock is likely to be volatile in the near term on account of market speculation around possible exits by some pre-IPO shareholders (VC/PE/Chinese investors) of the company as well as erstwhile shareholders of Blinkit who had received it under a share swap deal."

However, the brokerage also added, "While we cannot accurately predict when (if at all) these shareholders would want to exit, we note that several of them are already sitting on sizeable gains, albeit a large chunk of it is unrealised. A few cues from past actions of these investors suggest that at least some of them would be eager to book profits post the recent run-up in the stock."

Hence, JM Financial expects a sizeable proportion of Zomato's shares could be available for trade in the near term. The total
value of the Zomato stock that all these investors hold basis CMP is Rs180 billion.

Even if one were to assume that only 50% of the VC/PE/Chinese investor stake would be available for trade, the total short-term outflows could be close to Zomato's total IPO size of Rs 93.75 billion, the brokerage explained.

Following this, JM Financial has strongly suggested that long-term investors use these liquidity events to build a sizable position in Zomato as it not only offers a strong play on India's online food services market but is also, post the Blinkit acquisition, shaping up into a formidable diversified play on online retail.

Thereby, the brokerage has recommended 'Buy' on Zomato shares for a target price of Rs 115 ahead.

On Friday, Zomato shares dipped by 1.81% to end at Rs 89.38 apiece on BSE. The company's market cap is at Rs 76,906.54 crore as of August 18.

From the current market price, Zomato shares are expected to rise by nearly 29% ahead.

Here's why JM Financial recommends 'Buy' on Zomato shares despite volatility ahead.

- Food Delivery: Deserves premium valuations to listed QSRs due to negligible capex and negative working capital cycle business model. In addition, Zomato is relatively more diversified as it's a play on the entire food services industry whereas QSR's are a play on just one or two cuisines. The brokerage also expects food techs to grow 1.2x-1.5x of the underlying QSR industry over a sustainable period of time.

- Blinkit: This grocery business is a formidable diversified play on e-commerce as the GOV mix has a decent proportion of non-grocery. We see a long growth runway for the business as it is essentially a play on retail commerce with a significantly large, diversified TAM compared to the food delivery business.

- Hyperpure: Low margin trading business, will at best make mid-single digits EBITDA margin.

- Dining-out: It could be a very high-margin classifieds business at scale, but currently going through a transition and incurring losses. Therefore deserves a discount to some of the premium classifieds players like Info Edge, Indiamart, etc. that operate at 10-20x sales multiples.

In the June 2023 quarter, Zomato earned a net profit for the first time to the tune of Rs 2 crore. The company posted a net loss of Rs 189 crore in the March 2023 quarter and Rs 186 crore in the June 2022 quarter. Profitability was driven by strong growth in the top line. Zomato registered a whopping 70.86% growth in revenue from operations to Rs 2,416 crore, from Rs 1,414 crore in Q1 of the previous fiscal. Sequentially, the growth was 17.51% from Rs 2,056 crore in Q4FY23.

Disclaimer:

The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, znor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.