Should Zomato's Ebitda Be Adjusted? Jefferies Sees 'Strong Rationale'

Metrics such as 'adjusted Ebitda' being reported by new-age, listed firms, in this case, Zomato Ltd., have "strong rationale", according to Jefferies.

"Many investors frown on Zomato's adjusted Ebitda but we see a strong rationale," the brokerage wrote.

In a note dated April 10, Jefferies said 85% of Zomato's ESOPs cost is due to a large one-time grant to Founder and Chief Executive Officer Deepinder Goyal ahead of the IPO and should run off.

"Accounting rules also upfront the profit and loss charge. New grants are declining sharply, and Zomato is no longer a startup that needs to heavily rely on ESOPs. The existing pool seems sufficient for several years. Any further ESOPs need over 75% shareholder approval, and investors have a strong say," it said.

Financial reporting using metrics such as adjusted Ebitda profitability, which is a deviation from traditional methods such as revenue, profit, and Ebitda, has irked market watchers. However, Jefferies said that stock-based compensation is a key tool for venture capital-funded internet firms to attract and retain talent.

The new grants, a leading indicator of future ESOP costs, have been declining steadily at Zomato in the last three years, it said. "ESOP grants were elevated over FY17–19 as Zomato was building its food delivery business, cash burn was high, and several senior leaders were hired. With scale, dependence on ESOPs has reduced, and ESOP costs should follow the fall in grants with a lag effect."

Jefferies has a 'buy' rating and a target price of Rs 100 on the stock, which implies a return potential of about 85% from the current levels. It sees a 25% annual growth in delivery revenue over FY22–26, along with unit economics improving steadily.

Of the 26 analysts tracking the company, 20 maintain 'buy', three suggest 'hold' and three recommend a "sell", according to Bloomberg data. The 12-month consensus price target implies an upside of 40.3%.