Zomato: Capturing a bigger pie of the food chain

2 Mar 2023 , 04:10 PM

Recommendation: Buy

Target Price: Rs 80

Analysts at IIFL Capital Services believe Zomato is on the cusp of reaching profitability and value creation, driven by 7x growth in revenues to USD4bn and ~USD500mn Ebitda by FY30. 

This would be driven by:

• Continued adoption of food and grocery delivery led by a permanent change in consumer behavior.
• Reduced competitive intensity and easier market structure. 
• Improved unit economics and operating leverage. 

Hence, analysts at IIFL Capital Services forecast Zomato to deliver 32% revenue Cagr over FY23-26; and reach Ebitda breakeven by FY26 – driven by steady improvement in Food Delivery and operating leverage in Quick Commerce.

Profitable leadership in Food Tech

Analysts at IIFL Capital Services believe the Food Tech market would remain a duopoly and achieve ~USD15bn GMV in five years. This is because of a combination of changing consumer behavior and improved market structure accelerating the path to profitable growth. They expect rising penetration, order frequency, consumer propensity to pay the delivery charges and operating leverage through scale benefits to drive 3x jump in Zomato’s Food Delivery revenues and achieve double-digit Ebitda margins by FY30.

Quick Commerce: Bet to grab a bigger pie of Food chain

Analysts at IIFL Capital Services believe Zomato’s foray into Quick Commerce has long-term merits and is aimed at capturing a bigger pie of consumers’ Food chain. It has synergies with food delivery and along with Hyperpure, it can create a bigger revenue pool than Food Delivery. While they expect Zomato to burn USD200mn+ before it becomes profitable given the competition here, it could be more profitable than food delivery in the long term.

Initiate with BUY

Analysts at IIFL Capital Services have initiated coverage on Zomato with 12-month DCF-based TP of Rs80, implying 5.7X/3.4X on FY24/26 estimated EV/Sales. The stock is trading at 3.5X FY24 estimated EV/Sales, offering 32% revenue Cagr over FY23-26, versus the Indian internet peers and global food tech players at 3.7X/1.3X EV/Sales, with 26%/16% revenue Cagr respectively. Key risks: Capital allocation, competition, regulations.