Zomato rebounds 6% from day's low post block deal; here’s why

Shares of online food delivery platform Zomato remained in focus today after billionaire Jack Ma-led Alibaba Group reportedly sold shares worth $200 million through a block deal. The Chinese e-commerce giant, through its finance affiliate Ant Group, owns a 13.3% stake in the restaurant aggregator. Post deal, Alibaba’s holding in the company will come down to 10%.

Reacting to the news, Zomato share price opened lower at ₹63, against the previous closing price of ₹63.55 on the Bombay Stock Exchange (BSE). Bouncing back from the early morning low, the stock gained as much as 5.7% to hit a high of ₹66.6, driven by strong volume trade. Around 27.4 crore equity shares representing 3.4% of the total equity of Zomato changed hands on the NSE, the exchange data showed. The market capitalisation of the food delivery unicorn stood at ₹54,945 crore at the time of reporting.

The stock currently trades 58% lower than its 52-week high of ₹157.95 touched on November 30, 2021. In the current calendar year 2022, the stock has fallen 55%, whereas it dropped nearly 15% in the past six months. Revering its losses, the counter has risen 1% in a month, while it climbed nearly 2% in a week.

Why is Zomato share rising despite reporting losses?

The share price of Zomato has gained 64% from its all-time low of ₹40.55 touched on July 27, 2022, despite reporting losses in the first two quarters of the current fiscal. The recent rally in foodtech company’s shares can be attributed to investors’ optimism about the company’s growing market share in the Indian food delivery business and its cost-cutting measures. The exit of Amazon from domestic food delivery business is also positive for the company.   

The Gurugram-based online food aggregator, which has a total of 3,800 employees, recently trimmed 3% of its workforce as part of its cost-cutting measures. This was the second job cut by the company after it laid off 520 employees, or 13% of its workforce, in May 2020.

Zomato shares have gained over 7% in the four out of last five sessions after the U.S.-based e-commerce major Amazon announced to shut down its food delivery business in India by the end of this year. The move is likely to increase the dominance of Zomato and Swiggy in the online food delivery market in India, which is expected to reach ₹1.85 lakh crore by the end of 2027, growing at a CAGR of 30% between 2022 and 2027.

Foreign brokerage firm Morgan Stanley in a latest report said that the exit of Amazon from the food delivery business in India will have a material implication. "Exit of Amazon from food delivery business highlights barriers to scale business for a new entrant," the global brokerage firm said.

The brokerage assigned an 'overweight' rating on Zomato with a price target of ₹92, an upside potential of 44% from the current market price.

Meanwhile, domestic research firm Kotak Institutional Equities has retained its ‘buy’ rating on Zomato with a target price of ₹100, citing the company’s incremental market share against Swiggy. “According to our analysis, Zomato seems to have captured incremental market share against Swiggy. In 1HCY22, the food delivery GMV share stood at 54:46 for the two companies. However, Swiggy’s take-rates appear much higher — much of the differential is potentially due to differences in revenue accounting,” the agency said in a report.

“Zomato’s market share gain, in what has been a tight and duopolistic market, is positive. According to media reports, Amazon has shut down its Indian food delivery business, following global cost-cutting measures. Though Amazon did not have a significant market share, this consolidation is positive for incumbents,” it added.

For the July-September quarter (Q2 FY23), Zomato reported sharp decline in its consolidated net loss to ₹250.8 crore against ₹434.9 crore in the same quarter last year. Its revenue from operations jumped 62.20% to ₹1,661.3 crore from ₹1,024.2 crore in the corresponding quarter last year. For the food delivery business, the gross order value (GOV) grew 23% year-on-year (YoY) on the back of growth in both order volumes and average order value.