While it was a day of losses for Zomato shares on Tuesday, falling as much as 6% to Rs 182.10, several leading brokerages remained confident in their positive outlook for the foodtech giant. Despite the intraday decline triggered by concerns around a proposed employee stock ownership plan (ESOP), target prices for Zomato were revised upwards by CLSA, Jefferies, Bernstein and Elara Capital.
CLSA upped their target to Rs 248 from Rs 220 previously. Jefferies and Bernstein both set targets of Rs 230 per share, representing potential upside of around 26-27% from current levels. Elara Capital was the most bullish, projecting Zomato could reach Rs 280 in the coming months. That target implies gains of over 50% are possible if Elara’s forecast comes to fruition.
So with such rosy targets from top analysts, should investors see this dip as a buying opportunity? Let’s take a deeper look at what’s driving the optimism as well as the factors weighing on shares in the near-term.
The Positives
Zomato undoubtedly has strong momentum behind its core food delivery business as well as the high-potential quick commerce segment led by Blinkit. Some key factors analysts are cheering:
- Continued leadership in the online food ordering market, with Zomato capturing over 50% share. Moat remains wide as barriers to entry for competitors remain high.
- Blinkit is achieving scale rapidly after the acquisition last year. Orders and grocery assortment volumes grew at a brisk pace last quarter. Expansion to 1,000 dark stores by 2025 signals confidence.
- Overall revenues jumped 73% in Q4. Blinkit and Hyperpure subsidiaries also posted triple-digit growth, diversifying revenue streams.
- Adjusted EBITDA is trending in the right direction. Losses are narrowing as the company moves towards profitability.
- Cash reserves of over Rs 6,000 crore provide ample firepower for future M&A and expansion plans.
- Management execution has been strong. Turnaround of food business and integration of Blinkit have proceeded smoothly so far.
- Longer-term opportunity in online grocery remains huge as the market is still in early stages of adoption in India.
- Valuations have corrected from peaks and are at more reasonable levels now versus price-to-sales multiples of 10-12x for global peers.
The Near-Term Headwinds
However, a few overhangs could cap upside over the next 3-6 months:
- Additional ESOP allocation of 2% of outstanding shares raises concerns over aggressive dilution for employees. This was a key trigger for today’s decline.
- Blinkit continues to bleed cash flows while scaling up. Significant investments are needed before break-even is achieved.
- Macro headwinds like high inflation, falling discretionary spends could impact order volumes in the consumer sector.
- Fierce competition from Swiggy, Reliance Retail’s JioMart and Tata could squeeze margins in the core food delivery segment.
- Global growth stocks, including technology names, have corrected sharply in 2022. Sentiment for loss-making Indian startups has weakened.
- Geopolitical risks like rising interest rates, recession fears overseas add volatility to markets.
So in summary, Zomato’s long-term prospects remain bright thanks to strong growth drivers and a large total addressable market. However, the road to profitability will be a gradual one and near-term challenges around costs and macro factors cannot be ignored.
A Balanced View
Taking the positives and negatives into consideration, a balanced view would be:
- For long-term investors with a 1-2 year horizon, this dip looks like a buying opportunity. Target prices indicate significant upside is possible once execution proves out.
- Those with a shorter 6-12 month view may want to wait for clarity on Blinkit’s path to profitability and the impact of the latest ESOP issuance.
- Aggressive investors could average into the stock on further dips, while conservative players may stay on the sidelines and watch how things unfold.
- Given high volatility in growth stocks, only risk capital should be deployed rather than the entire capital for higher risk-reward.
- Set price alerts and reassess if Zomato moves below Rs 160, signaling further weakness in the stock.
- Be prepared to average down cautiously on dips rather than going all in at current levels.
In summary, analysts see multiple levers for long-term growth yet acknowledge near-term challenges. A balanced, staggered approach seems most suitable than taking an extreme bullish or bearish view. For long-term portfolios, this dip in a high-quality name like Zomato looks a good buying opportunity. But only invest amounts you’re comfortable seeing stuck for 12-18 months.
