22 Feb , 2022 By : Kanchan Joshi
Analysts at Ambit Capital like Zomato’s core business (food ordering, classified, hyperpure) but concern was excess optionality built into price despite limited adjacency set vs global peers, which as per the brokerage was addressed post 41% correction in stock since its Sell rating.
Brokerage house Ambit Capital has changed and upgraded Zomato shares rating to ‘Buy’ from Sell on strong scale-up over next 20 years in food ordering with sustained profitability from FY27E (1-year pushback vs earlier) at 45-50% market share, with a target price of Rs106.
On what has led to the rating change, Ambit Capital said, “We saw value in Zomato’s core business (where it is outperforming Swiggy), but too much optionality built in price and limited adjacency set versus global peers drove our SELL. With stock correction, that optionality is off the table, even as long-term core business confidence stays largely intact, excluding some near-term misses in 3Q on food ordering. Lower food ordering/dine-in growth partly countered by higher hyperpure revenues limit growth downgrades."
Shares of Zomato have declined more than 40% in 2022 (year-to-date or YTD) so far from Rs140 level to Rs80 currently. The stock is down about 35% since its listing in July last year.
Ambit Capital sees Investment intensity and Swiggy moves to possibly determine stock moves. Well-funded Swiggy’s aggressive adjacency expansion to grocery/pick-up & drop/ride hailing or dine-in foray prevents a more constructive stance, as per the brokerage.
“Zomato should be a beneficiary of India’s food ordering scale-up to 200 mn users by FY40E. We see Zomato make 25?IT margins by FY40E as scale brings efficiencies. Our bull/bear case scenarios suggest a TP of Rs157/66 making risk-reward favorable," Ambit Capital's note added.
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