Shares of Zomato Ltd. gained after Citigroup Inc. said the monetisation of dining out on food delivery giants Zomato and Swiggy is a medium-term positive.
The two platforms have launched dining out under promotional events such as Zomato's Carnival and Swiggy's Great Indian Restaurant Festival, which was born out of its acquisition of Dineout, the brokerage said in a note.
"While this appears to be a limited roll-out for now, with select restaurants only and limited time-based slots, nevertheless, it's positive for medium-term platform monetisation, as it opens the door to direct customer monetisation in the dining out segment, in addition to advertisement revenues from restaurants," it said.
The brokerage awaits more clarity on commercials before incorporating into its model for valuing Zomato at this time.
Citi has a 'buy' rating on the Deepinder Goyal-led company, valuing it at Rs 76 apiece. That implies an upside potential of 28.8% from current levels.
Of the 27 analysts tracking the company, 21 maintain 'buy', three suggest 'hold' and three recommend 'sell'. The return potential of the stock implies an upside of 26.7%.
Citi's quant model assigns a "high risk" rating to Zomato due to its short trading history, but the brokerage said that the rating is "unwarranted", considering the company's more-than-adequate net cash position of over $1.2 billion and asset-light business model.
It also listed a few downside risks that could impede the stock from reaching its target price, including:
Cash burns in quick commerce opportunities remain elevated, and business doesn't scale to levels required for healthy unit economics.
Regulatory action on delivery partner remuneration.
Higher-than-expected impact on profitability, owing to the pursuit of growth in food delivery.
Challenges in delivering on growth while managing multiple stakeholders.
Incremental investments in early-stage internet businesses.
Shares of Zomato gained as much as 7.9% to Rs 60.4 apiece, compared to a 0.13% advance in the S&P BSE Sensex.
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