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Zomato shares: Why JPMorgan has upgraded the stock's rating to 'Overweight'

28 Jan , 2022   By : Kanchan Joshi


Zomato shares: Why JPMorgan has upgraded the stock's rating to 'Overweight'

Zomato share price has corrected 30% in year-to-date as compared to over 1 percent fall in Nifty. This sharp correction, as per JPMorgan provides an opportunity to reassess its view on the stock. It views Zomato as compelling post the recent correction in contrast to its strong execution and has upgraded rating from underweight to overweight.


“We turn more constructive, as our alt-data analysis of its restaurant network and channel checks suggest Zomato’s medium-term profitability is likely to be better than we thought. Zomato is less vulnerable to a reversal of premium supply, while discounts are less widespread than peers,," analysts at JPMorgan said in a note, who have a price target (Mar-23) of Rs13 on the stock.


JPM has upgraded Zomato stock to overweight for four reasons - It expects Average Order Value (AOV) to be sustainable in the medium term as it has a low proportion of premium restaurants, sees a reduction in discounts from Zomato as discounts become increasingly merchant funded given rising platform power, sustainable AOV along with reducing discounts should lead to higher contribution margins.


It further sees strong long-term growth led by penetration and some increase in frequency among existing cohorts, with Zomato retaining its current share of the food delivery industry with the opportunity to build a quick grocery practice that can expand its TAM.


JPMorgan also takes a more constructive view of potential synergies from Blinkit (Grofers) as its download/engagement and retention stats sharply beat those of its peers.


“Blinkit appears to have broken out from the competition on quick grocery (~10 min) delivery model. Its audience is now convenience-based which is more monetizable with higher synergies with Zomato. While unit economics should evolve, <30>


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