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Global brokerage firm Jefferies says that every investor it met is convinced of Zomato’s food delivery potential, given the concept is well accepted across markets.
‘There have been some questions around the pace of growth, cultural aspects, availability of labour and women workforce participation but no one questioned the opportunity itself. Management expects strong growth momentum in the medium term (30 percent CAGR – according to Jefferies),’ the brokerage said in a note on Tuesday, after hosting Deepinder Goyal, Founder and Akshant Goyal, CFO for investor meetings in the US.
On Wednesday, Zomato shares advanced close to 2 percent intraday and were trading 0.5 percent higher at Rs 63.20 at 1:50 pm.
Jefferies has given a ‘buy’ rating to the foodtech’s stock with a target price of Rs 100, meaning it sees a nearly 60 percent upside in the stock from Tuesday’s closing price.
According to Jefferies, Zomato’s management believes the company has been able to take a lead in the market although competition (including Swiggy) remains intense and so the focus is on execution.
Jefferies is also of the view that investors have been positively surprised with the accelerated path to profitability recently. The brokerage, however, said, that investors are still not fully convinced about the break-even guidance by Mar-Sep 2023. Therefore, if the platform meets the target, it could be a positive surprise, it said.
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It expects Zomato’s contribution margin to steadily rise from 2.8 percent in April to the June quarter led by higher restaurant take rates (readjusting older contracts), ad revenues, higher customer take rate, delivery efficiency, etc.
Investors continued to be highly skeptical of quick commerce, given there is no proof of concept yet in any large market in the world, the brokerage note.
‘A lot of investors expressed a fundamental question on Blinkit’s existence, with comments like ‘why someone wants grocery delivery in 10-min?’. In the event of success, there is concern on competition from Amazon, Flipkart & Reliance Retail,’ Jefferies said in its note.
Meanwhile, Zomato’s management is confident in the quick commerce model as it sees a possibility of it becoming bigger than food delivery in the long term.
Last week, another brokerage UBS said that Zomato is the perfect combination of growth and margins. The brokerage expects the Indian food delivery market to triple or quadruple its current size and anticipates a compounded growth rate of 33 percent until fiscal 2025-2026
