Zomato shares rally 4% even as JM Financial trims food delivery biz growth estimates for FY23-27

Zomato shares rally 4%

Despite a brokerage cutting its growth projections for the company’s food delivery division during the FY23-27 financial years, fintech giant Zomato traded positively on Monday. According to JM Financial’s most recent research, channel checks indicate that food delivery Demand is expected to stay modest sequentially in Q4, which would be the third time in a row. The firm has set a target price of $100 and continues to recommend that investors “Buy” the stock.

Zomato’s stock was trading at 53.94 per share at the time of writing, up 3.47% on the BSE. The stock has increased by at least 4% overall, reaching an intraday high of $54.20 a share.

For the second day in a row, Zomato stock is surging upward.

“Our current channel checks imply sequential food delivery Volume growth is expected to be moderate for the third consecutive time in Mar-Q,” JM Financial wrote in its most recent research report.

According to the brokerage, the persistent pressures on inflation, the rising share of eating out, and the emphasis on profitability improvement are the main factors affecting growth (to support growth investments in adjacencies such as Blinkit and Hyperpure). Notably, the company appears to believe that mining high-quality customers (those whose ordering frequency is very high) has a higher long-term value creation potential than investing in growing the long-tail of customers who order infrequently. This is evidenced by the relaunch of the “Gold” loyalty membership and the closure of operations in 225 cities.

The statement from JM Financial further stated, “Although this strategy may negatively affect the short-term Sales trend (in the context of weak macros), it may also hasten the expansion of profitability. These events also imply that 1) higher take-out rates at restaurants and 2) a more rapid drop in delivery costs may be possible than previously thought.”

The brokerage stated as a result, “Although we now predict Zomato’s food delivery segment to grow at a CAGR of c.21% during FY23-27 vs. the earlier estimate of 25%, contribution margin (as% of GOV) might reach 7% by FY27 versus FY34 expected earlier.”

Zomato’s food delivery growth predictions have been revised downward, but JM Financial still thinks the company has a bright future.

It said, “We continue to be optimistic about the company’s long-term prospects in the hyperlocal delivery market because we think it is well-positioned to gain from strong industry tailwinds like rising incomes among millennials and GenZ, who grew up with technology. The balance sheet is still strong, with net cash of 113 billion as of December 22, 22.”

The brokerage continued, “We continue to value the combined business using a 15-year DCF (WACC of 13% and Tg of 6% to arrive at a Dec’23 FV for Zomato of 100.

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