Zomato share price rises 20% in a month. Edelweiss has 'Buy' tag
Premium- Edelweiss has maintained its positive stance on Zomato shares on the core business, considering long growth runway and path to profitability
Shares of Zomato have risen about 20% in a month as compared to a 5% fall in benchmark Sensex. Domestic brokerage and research firm Edelweiss has maintained its positive stance on the stock on the core business, considering long growth runway and path to profitability.
"On a standalone basis, unit economics of instant grocery delivery are weak. Even so, food delivery platforms world over are foraying into this space in search of increased order density, and consequently lower cost per delivery," the brokerage said in a note.
The brokerage house has maintained ‘Buy’ tag on Zomato shares with a target price of ₹80, considering its long growth runway and path to profitability in core business. Faltering execution in grocery driving up cash burn remains a key risk, it said.
"A relatively weak quality of network effect in food delivery necessitates delivery cost leadership for success. Swiggy’s success in grocery has given it an upper hand. Hence, the Blinkit acquisition at reasonable valuations and successful strides in grocery delivery are crucial for Zomato to stay competitive," the note stated.
The brokerage is neutral on Zomato's Blinkit acquisition, assuming valuations are reasonable (around $600 mn) and the company is able to generate around 5% synergies from lower delivery costs.
“Also, we prefer Swiggy’s strategy of combining grocery and food delivery in a single app, something which has resulted in higher stickiness for global companies. Zomato’s management has assigned an upper bound of $400 mn towards quick commerce investment for the next two years (CY22, CY23E). Any deviation from this would be a key risk to our hypothesis," Edelweiss added.
For Zomato, the brokerage believes Blinkit’s acquisition is a necessary evil. In a business with weaker network effects, cost leadership is vital for success. With Swiggy having established strong grocery delivery franchise leveraging its existing delivery fleet, Zomato will look to follow suit via Blinkit’s takeover.
"We do expect Blinkit’s valuation to reset at a lower level than the USD1bn in the previous round, considering correction in valuations in this space. We note a 5% reduction in cost per delivery is possible with the Blinkit acquisition which, ceteris paribus, can lead to 70bp higher contribution margins as % of AOV and 11% higher valuation if these benefits are sustained," Edelweiss' note said.
The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.