Zomato shares hit 52-week high; here's why

Shares of food delivery giant Zomato hit a 52-week high on Tuesday even as benchmark indices – the Sensex and the Nifty – closed half a percent lower.

The Zomato stock closed 4.14% higher at ₹105.70 apiece on the National Stock Exchange (NSE) ahead of the 2023 ICC Men's Cricket World Cup, which begins on October 5, 2023. The company's market capitalisation jumped to ₹90,948 crore. On a year-to-date basis, the counter has gained 75%.

The rise in Zomato's share price comes days after foreign brokerage Jefferies said the food ordering company has a long runway for customer acquisition and revenue growth.

With only 20 million monthly transacting users currently, Zomato has a long runway for customer acquisition and revenue growth, albeit this may come at the cost of near-term profitability, the brokerage said in a note. The food delivery major clocked a profit for the first time in the quarter ended June.

Jefferies expects around 20% CAGR (compound annual growth rate) in delivery revenue over FY23-26E in its base case. The brokerage says unit economics to steadily improve with scale as Zomato unlocks cost efficiencies and as customer willingness to pay for convenience increases. Its base case price target on Zomato is ₹130. Among the downside risks, Jefferies cites an increase in competition from Swiggy as well as direct ordering.

Zomato's quick commerce arm, Blinkit, is larger than Zomato in some cities, with similar per-order contribution, according to Jefferies. "General merchandise helps growth but is especially important for profitability. Target is to break-even within the next four quarters, and stay there for some time as more dark stores are added to drive growth," it says.

India retail is a sizeable opportunity and Zomato sees itself as a 10-min e-commerce platform, according to Jefferies. Zomato aims to grow its quick commerce business at 60% CAGR in the medium term, and it could eventually be bigger than food delivery, says Jefferies, adding that a real estate team has been put in place to find the right store locations.

Zomato continues to look out for new opportunities and an eventual foray is contingent upon management's confidence in the new line of business, which would eventually be scalable as well as profitable over the longer term, says Jefferies. "Until IPO, it was all about survival but post-IPO and given enough capital, focus is to keep organisation future-ready," the brokerage says, adding that there is focus on preserving a start-up culture, which means a foray into new areas is not ruled out.

With food ordering also being available on the Open Network for Digital Commerce (ONDC), Jefferies says it is watching ONDC with interest although food delivery is a tough business.

Zomato’s net profit stood at ₹2 crore in the first quarter compared with a loss of ₹186 crore in the year-ago period. Revenue from operations soared 71% year-on-year to ₹2,416 crore during the April-June quarter as against ₹1,414 crore in the corresponding quarter of the previous year.

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