This Midcap Stock Is Preferred Pick Among Internet Stocks, Brokerage Suggests Buy For 44% Upside

Kotak Securities in its December 26, 2022, report on Zomato Limited has placed a "Buy" on the stock for a target price of Rs 85 apiece. Considering the given target price, if you buy the stock today at the current market price it would give you a return of up to 44% in investments. Zomato is an internet based food services sector company that delivers food to customers. It is a midcap company with a market capitalization of Rs 51,164.19 crore.

Stock Outlook & Returns

The stock is trading at Rs 59 apiece on NSE, 1.46% up from its previous close. It recorded its 52-week low at Rs 40.60 apiece on 23 August 2022, and the 52-week high at Rs 142.45 apiece on 03 January 2022, respectively. The stock made its debut on the exchange on 23 July 2021. Since its listing, it has given 53.17% negative returns. The stock has fallen 6.44% in the past 1 week. It has fallen 8.13% in the past 1 month and it has fallen 55.71% in the past 1 year.

Near-term growth may be under pressure on weak demand

After posting 35% yoy food delivery GMV growth in 1HFY23, we expect Zomato's food delivery growth to decelerate to 21% yoy in 2HFY23. Although AOVs are likely to hold up due to inflation and relatively higher delivery charges, slower growth in orders will lead to slower GMV growth. This, in turn, is owing to weak consumer demand in what otherwise is a seasonally strong quarter for outdoor food consumption. We reckon the weakness is pan-India, with a slowdown in demand in metro and non-metro geographies. The fact that restaurant chains are also witnessing a slowdown (refer to our consumer team's note 'QSR - moderating estimates in view of the consumption slowdown' published on December 23), indicates the slowdown is across channels and delivery is not necessarily losing share to in-store dining.

Zomato has begun some initiatives to induce customers to order more

Kotak Securities said, "We note that Zomato has begun offering customers free deliveries for limited time after payment of an additional fee with an existing order. Anecdotally, the additional fee, number of free deliveries offered and duration over which customers can avail free deliveries seem to be different for different consumers, indicating some select targeting by Zomato. While selective, this offering can result in flat contribution margins for Zomato over the next 1-2 quarters."

Growth of food delivery companies globally has stuttered

An analysis of post-Covid quarterly earnings reports of global food delivery companies suggests that GMV growth has come off meaningfully in CY2022, as Covid-induced demand receded. In comparison, Zomato's growth trajectory has still been much better, given the relatively underpenetrated Indian market, and the convenience and variety offered by Indian delivery companies.

Trim estimates; retain BUY with revised FV of Rs 85

Kotak Securities said, "We bake in slower food delivery GMV growth forecasts of 26/24/22% over FY2023/24/25 versus 32/30/30% earlier. We revise up our CM assumptions to 4.3/4.5/4.9% from 4.0/4.2/4.6% of GMV, but continue to be substantially below Zomato's mid-term guidance of 8% CM. Lower growth forecasts drive a revised DCF-based FV of Rs85 (Rs100 earlier). Zomato is our preferred pick among internet stocks, given the duopolistic market structure and large market potential."

Disclaimer

The stock has been picked from the brokerage report of Kotak Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.