Zomato Share Hits New 1-Year High After Strong Q2, 105% Returns YTD; To Deliver More Growth!

New-age company, Zomato shares witnessed a huge rally after Q2 results to the point it touched a new 52-week high and also emerged as a multibagger with triple-digit returns year-to-date. Zomato shares ended at Rs 123.30 apiece, up by 6% on BSE with m-cap of over Rs 1.06 lakh crore. Zomato is on a long runaway for growth and brokerages expect its EBITDA to gain as well by the third quarter of FY24. Accordingly, they recommend buying with potential upside of as much as 26%.

On November 6th, Zomato shares touched a new 52-week high of Rs 123.90 apiece. Year-to-date, the stock has gained by nearly 105% on BSE.

The food delivery app continued to earn profits in its financial books. The company's net profit which was merely Rs 2 crore three-months ago, has now climbed to Rs 36 crore between July to September 2023 period. Zomata has turned profitable since Q1FY24. It had posted a net loss of Rs 251 crore in Q2 of FY23.

Also, the top-line front witnessed robust growth. In Q2FY24, the company's revenue from operations jumped to Rs 2,848 crore, as against Rs 1,661 crore in Q2FY23 and Rs 2,416 crore in Q1FY24.

According to Motilal Oswal, the food delivery business is still in a nascent stage in India with a long runway for growth. With a dominant market share and strong growth in the food delivery business and Hyperpure, we expect Zomato to report a strong 53% adj. revenue CAGR over FY23-25.

Also, Motilal estimates Zomato to turn positive on reported EBITDA by 3QFY24 (earlier 4QFY24) and deliver a 4.1% EBITDA margin in FY25.

Thereby, it said, "We value the business using a DCF methodology, assuming a 4% terminal growth rate and 12.5% cost of capital. We maintain our BUY rating with a TP of INR135, implying a 16% potential upside."

Meanwhile, JM Financial's note said, "Zomato's sequential GOV expansion in food delivery (+9% QoQ vs. JMFe of +4%) as well as Blinkit (+29% QoQ vs. JMFe of +17%) businesses in 2QFY24 surprised us positively. Another positive surprise was the near-doubling of the company's Gold membership program from 2mn to 3.8mn, in a matter of just one quarter, amidst muted growth trends in the underlying industry and intensified competitive intensity. Gold subscribers now contribute c.40% to Zomato's food delivery GOV vs. 33%/19% in 1QFY24/4QFY23. These developments augur well for the business, as subscriptions typically have a positive impact on a) customer stickiness and 2) ordering frequencies."

JM's note added, "We highlight that Gold orders presently have a significant dilutive impact on contribution margin, which led to slowing down of sequential adj. EBITDA margin expansion in the food delivery business in 2Q, indicating a deliberate trade-off by the management. During the quarter, Blinkit exceeded expectations on sequential GOV growth but also turned contribution margin break-even and narrowed adj. EBITDA loss %. The company continues to guide for adj. EBITDA break-even in the business by 1QFY25, which we believe is achievable. Basis the results and strong GOV growth outlook in key businesses, we expect the stock to remain buoyant despite sharp recent up-moves."

On valuation, JM's note said, "With food delivery EBITDA margin gradually moving towards steady-state levels and Blinkit business turning contribution level profitable, we now use a lower WACC assumption of 12.0% vs.13.0% earlier. Simultaneously, we roll forward our DCF-based valuations to Mar'25 (Sep'24 earlier). Both these factors together lead to a revision in our TP to INR 155 vs. INR 115 earlier. Zomato continues to be one of our preferred picks in the listed Internet space as we believe it is well-positioned to benefit from robust industry tailwinds for the hyperlocal delivery businesses. Its balance sheet also remains strong with net cash of INR 118bn as of Sep'23. Maintain 'BUY'."

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.