Jefferies has reiterated its "high-conviction buy" on Zomato Ltd. while responding to investor backlash and meme fest on social media as the stock tumbled.
Concerns stem from the company's foray into quick commerce through the Blinkit acquisition, stagnating monthly transacting users and lack of profitability in the mainstay food delivery business.
The reaction from investors came as Jefferies' 'buy' call coincided with the food delivery company's stock tumbling to record lows for two consecutive days. It fell to as low as Rs 41.2 apiece compared with the IPO price of Rs 76. Zomato opened higher Thursday but erased gains.
Jefferies, in a July 27 note, addressed concerns, point-by-point, regarding some of its bullish predictions about the company's business outlook.
Concern #1: Quick Commerce And Blinkit
Concerns persist on foray into quick commerce along with the choice and timing of Blinkit acquisition.
Jefferies said an organic foray into the sector was not an option as Zomato was already late.
While delay may have brought down Blinkit valuation, this would have also led to a business deterioration (curtailed operations, poor service levels).
Jefferies shares the concerns on quick commerce foray itself, which is not very different from Nykaa's fashion/business-to-business foray or ITC's fast moving consumer goods foray two decades back.
Dilution may not have changed much for Zomato shareholders as correction in valuations led by macro concerns impacts both.
Concern #2: Stagnation In Monthly Transacting Users
Investors also share concerns on MTUs which have stagnated at 1.5-1.6 crore in the past three quarters and if affordability ceiling has been hit.
Jefferies said 5 crore active users order less than once a month. Against this, the top cohort (18 lakh users) that orders more than four times a month forms 4% of active users but contribute well over 20% to gross order value.
Conversion from active users itself provides headroom to drive monthly transacting users growth in the medium term, which may not require significant customer acquisition costs, it said.
Concern #3: Profitability In Food Delivery
Investors are not convinced if food delivery could break-even in foreseeable future.
Jefferies said acceptance for delivery has been rising and ability of Zomato to charge restaurants and customers has been going up. A duopoly industry structure should also help as Swiggy would also like to focus on profitability given the current context.
Interactions with restaurants indicate Zomato has also been raising take-rates for past contracts and bringing it closer to current levels, which should help.
In addition, Jefferies sees lower subsidies and discounts going ahead and continues to model Ebitda break-even by end-FY25.
Concern #4: Capital Raise
Zomato reported Q4 Ebitda loss at Rs 220 crore and Blinkit had a monthly Ebitda loss of Rs 110 crore in May 2022.
Put together, even if we assume no improvement, full-year Ebitda loss annualises at Rs 2,200 crore. With minimal capex, Jefferies does not see a need for capital raise in the medium term, with net cash at Rs 12,000 crore.
The sharp correction in Zomato's share price has pulled down valuations to 0.6 times the one-year enterprise value-to-gross merchandise value ratio. "Premium to global and regional tech names has gone down, and we see value emerging in Zomato at current level."
It reiterated its "high conviction buy". "We believe that stock already ascribes a zero to even negative value to Blinkit at different levels of assumptions on base business."
Jefferies has a target price of Rs 100 on the stock, implying a potential upside of 140%.
Shares of the company rose as much as 5.4% intraday and ended 3.5% higher on Thursday.
Of the 18 analysts tracking the company, 14 maintain 'buy', two suggest 'hold' and two recommend 'sell'. The overall consensus price of analysts tracked by Bloomberg implies an upside of 101.6%.
RECOMMENDED FOR YOU
POPULAR