Jefferies Retains ‘Buy’ On Zomato Even As Shares Slide 23% In Two Days
Zomato has underperformed food delivery peers so far this year, says Jefferies.
Jefferies reiterated its ‘high-conviction buy’ rating on Zomato Ltd. even as it has underperformed global and domestic food tech peers so far this year.
“From an exuberance at the time of listing last year, Zomato is now unloved,” the research house said in a July 25 note. “Blinkit acquisition elongates path to profitability and despite management guidance on a break-even in food delivery, investors are not giving much benefit of doubt.”
Jefferies, however, said this “makes for a great case” for investors to ‘buy’.
Shares of the food ordering platform slumped 13.45% to a new record low of Rs 41.2 apiece during the session, before closing at Rs 41.65. This is the second straight day of the stock hitting a fresh low. It fell 14% intraday on Monday. The decline comes after the lock-in period ended for investors who owned stakes in the company before its initial public offering.
The stock has declined more than 45% over its issue price of Rs 76, and 64% over its listing price of Rs 116 since its debut on July 23, 2021.
“Worries of Fed tightening are weighing on the profitless internet names globally. The entire sector has been going through a period of readjustment as the focus is shifting from growth to cash flow,” Jefferies said. “This has also been impacting the global food delivery stocks, with Zomato being the worst-performing.”
But even after the “sharp correction in Zomato share price, the stock now trades at 0.9x 1-year forward EV/GMV and 3.5x EV/revenue”. While this, it said, is at a premium to global and regional peers, this is justified in the context of long growth runway along with higher explicit medium-term forecasts on gross merchandise value (30% for Zomato versus 10-20% for peers).
Jefferies said unlike the past when Zomato intended to invest across multiple businesses, the company now plans to conserve cash. It does not plan to commit any resources for existing or now minority investments.
“We also see a consistent improvement in profitability in food delivery despite strong 30% CAGR over FY22-25E (well ahead of global/regional peers). We retain buy.”
Jefferies is not alone. Of the total 18 analysts tracking Zomato, 14 have a ‘buy’ rating on the stock. Two each suggest a ‘hold’ and a ‘sell’, according to Bloomberg data. The 12-month consensus price target implies an upside of 110%.