Zomato Trading At A Premium Valuation; SBI Sec Maintains Buy For TP 214 For 15.6% Potential

Investors in the stock market have been buzzing about Zomato's shares after the company disclosed that it has been in talks with Paytm to acquire the company's movie and events division for an estimated Rs 1,500 crore transaction if carried out will be the second largest acquisition deal for Zomato after acquiring Blinkit in 2021 valued at Rs 4,447 crore. The brokerage firm SBI Securities has launched a buy call on Zomato shares, with a target price of Rs 214, representing a 15.6% potential upside from the CMP. According to Bloomberg consensus estimates, the stock currently trades at FY25E/FY26E consolidated PE of 110.8x and 58.5x, respectively, reflecting a premium valuation for investors.

5 Reasons To Buy The Shares of Zomato According To SBI Securities

Diversified business model: The company operates under 4 broad segments viz Food delivery, B2B supplies, Quick commerce and others (Dining out, Zomato live etc). Under food delivery, an estimated 63 million orders were delivered to 18.4 million annual transacting customers in FY24. Hyperpure is its B2B platform that offers fresh, hygienic, quality ingredients sourced directly from farmers, mills, producers and processors to restaurant partners. Under Quick commerce, Zomato delivers everyday products to customers through Blinkit.

Strong brand; Expanding the product offerings: The company enjoys robust brand recalls as it is a popular platform for sourcing of foods in urban areas. Over the years, the company has expanded its service offerings. Zomato acquired Blinkit in 2022 to delivery grocery products. Blinkit caters to a wide variety of customer needs starting from grocery and household essentials to multiple other categories of products. The other segment like dining out enables customers in restaurant discovery, restaurant review, table reservation, deals and offers.

Presence in 800+ cities; Penetration is rising: Food delivery vertical has presence in 800+ cities contributing 63% of overall sales while Quick commerce and Going out has reach in 26 cities and 41 cities respectively. B2B supplies has presence in 8 cities. The growth outlook for food delivery platform is on strong footing given low penetration as India has only 3 QSR per 10 lakh population v/s 115 and 13 in case of USA and China respectively. Restaurant base continues to grow as food delivery market is still underserved from a standpoint.

Strong performance; To double the store count: During 4QFY24, the company has reported strong financial performance with consolidated Revenue increasing 73.3% YoY to Rs 3,562 cr while EBITDA and PAT for 4QFY24 stood at Rs 86 cr and Rs 175 cr respectively v/s EBITDA loss of Rs 226 cr and net loss of Rs 188 cr respectively. Management has guided for doubling store count of Blinkit to ~1,000 by FY25. The focus will be to expand in top 8 cities, especially in large cities such as Bangalore, Mumbai, Hyderabad among others where penetration is low.

Valuation is premium but well supported by earning growth: At current price, the stock trades at FY25E/FY26E consolidated PE of 110.8x/58.5x respectively based on Bloomberg consensus estimates. The valuation based on PE looks premium but growth going ahead the valuation multiple will stabilize in medium to long term as earning picks-up.

Latest News On Zomato In Talks To Acquire Paytm's Movies, Ticketing Business'

"We have noticed that there are certain news articles circulating in the mainstream media with the subject "Zomato in talks to acquire Paytm's movies, ticketing business". This voluntary disclosure is being made to clarify our stance on the matter given that any transaction that is considered potentially meaningful may create uncertainty in the market. We acknowledge that we are in discussions with Paytm for the aforementioned transaction, however, no binding decision has been taken at this stage that would warrant a Board approval and subsequent disclosure in accordance with applicable law. The above discussion is being undertaken with an intent to further strengthen our Going-out business and is in line with our stated position of focusing only on our four key businesses currently," said Zomato in a regulatory filing on Sunday.

"In response to recent media coverage regarding ' Zomato in talks to acquire Paytm's movies, ticketing business,' we would like to voluntarily clarify our position. The Company routinely explores various strategic opportunities aimed at enhancing shareholder value. The potential transfer of Paytm's Entertainment business, a component of our Marketing Services, is one opportunity under consideration. As noted in our earnings call, our focus will be on payment and financial services along with digital goods commerce, which are designed to help our merchants scale their businesses. However, any discussions currently underway are preliminary and do not involve any binding agreements that require approval or disclosure under Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, or other applicable laws. As such, any information pertaining to these discussions should be considered speculative at this time," One 97 Communications, the parent company of Paytm informed to the stock exchanges on Sunday.

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.