Nomura set the target price at Rs 50, following which the stock fell more than a percent in the morning to trade at Rs 60.75 on BSE
Nomura Financial Advisory and Securities (India) Limited initiated coverage on Zomato with a “reduce” rating and a target price 19 percent lower than the prevailing price, saying a double-digit contribution margin in food delivery is a tough task.
Nomura set the target price at Rs 50, following which the stock fell more than a percent to trade at Rs 60.75 on BSE on August 22 morning.
Abhishek Bhandari, an analyst at Nomura Financial Advisory and Securities, said he expects Zomato’s food delivery business to become profitable at the adjusted Ebitda level by Q1FY24 led by disciplined execution in a duopoly market.
Earlier this month, Zomato announced it broke even in its food delivery business. The Gurugram-based food aggregator plans to break even on an overall basis by March 2023.
Bhandari said Zomato’s target of reaching “double-digit” contribution margin in the long term hinges on a rise in commissions from restaurants, which he expects to rise from 15 percent in FY22 to 17.5 percent in FY31. The target would also call for higher customer delivery fees, which Bhandari said would be difficult.
“We expect food delivery revenue growth to moderate by FY27,” Bhandari said, adding, FY22-27 gross order value CAGR would be 22 percent compared to FY27-31 CAGR of 12 percent, thanks to flattened monthly ordering frequency.
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Nomura’s bearish stance contrasts with recent moves in the stock as well as opinions of Kotak Securities and Jefferies who see the stock as a buying candidate. Jefferies has a target of Rs 100, while Kotak sees the stock’s fair value at Rs 79.
The company’s move to stop its “Pro “membership services also weighed on the stock price. “Pro” membership offered discounts while ordering food online or eating out at Zomato’s partner restaurants.
The company said Zomato Pro was being “manifested into something better based on feedback from customers and restaurant partners”, hence it was unavailable for purchase or renewal. The service often got a lot of flak from customers and restaurant partners alike.
Over the weekend, Zomato withdrew an advertisement featuring actor Hrithik Roshan and apologised, clarifying the Mahakal reference was to a restaurant and not the temple. Priests of the famous Mahakaleshwar temple in Madhya Pradesh had objected to the ad, claiming it offended Hindu sentiments and demanded its withdrawal.
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Shubham Raj is a journalist with over five years of experience covering capital markets. His last stint was with The Economic Times where he wrote on daily happenings in stock markets and led IPO reportage. He also wrote on mutual funds and cryptocurrencies.
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