Kotak Institutional Equities now says sell-off in Zomato overdone, sees 73% upside


After Jefferies said earlier this week that Zomato deserved much better valuation than what the market was ascribing, Kotak Institutional Equities upgraded the stock to ‘buy’ from ‘add’ with the target at Rs 79 per share.

The domestic broker said the recent stock price decline triggered by expiry of the lock-in period for shares held by insiders was overdone. The stock fell about 20 percent within two sessions following the expiry. Prices have stabilised since then, even it sees low-level buying.

“We believe the sharp correction is unwarranted and the current price is baking in fairly pessimistic growth assumptions for the food delivery business,” said Garima Mishra, an analyst at Kotak Institutional Equities.

She said that her fair value of Rs 79 already bakes in $ 400 million of cash investment in Blinkit but nil value accretion. The acquisition has been a bone of contention recently that many believe was done at an exorbitant valuation.

Going by this target price, the potential upside stands at 73 percent.

Mishra said that at Rs 44, her analysis implies that the stock is pricing in an extremely bearish view, including cumulative cash burn of $ 1.6 billion in food delivery, sharply lower contribution margins of core food delivery business, and nil value accretion from the existing minority investments as well as Blinkit.

“Zomato will need to make upfront investments in the quick commerce business. However, its March 2022 cash balance of $ 1.6 billion is sufficient in our view to fund the next few years of losses,” said Mishra. “We project $ 525 million of losses in food delivery and quick commerce over FY23-24 implying that Zomato will still end up with a cash balance of $ 1.1 billion by March 2024.”

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Kotak also believes Zomato’s food delivery business is well-poised to grow at a strong pace over the next decade led by attractive market opportunity and strong execution capability.

The assessment by Kotak is similar to Jefferies that has a target price of Rs 100 on the stock, building in 119 percent potential gains in 12 months.

Though this is in contrast to fair value determined by valuation guru Aswath Damodaran who believes Zomato share price should be Rs 35 per share.

As of 10.42am, shares of Zomato traded at Rs 46.26, up 1.31 percent on July 29.

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