Kotak Securities has initiated coverage on Zomato stock with a ‘buy’ rating, saying that the share price could rally another 24% from the current levels. Zomato’s stock valuations are justified by the superior growth expected, the brokerage firm said in a note. Kotak has pinned a fair value of Rs 175 per share on Zomato. The food delivery giant began trading on Dalal Street in July this year after its Rs 9,375-crore IPO was oversubscribed. The stock has rallied a whopping 84% from the upper end of the IPO price of Rs 76 per share.
While most domestic brokerage houses have given a ‘buy’ rating to Zomato, value investors such as Rakesh Jhunjhunwala and global brokerage firm HSBC have said not to buy the stock.
Stock Talk: Zomato share price valuations justified
-Zomato stock is trading at 11X FY2024 EV/adjusted sales. This is at a premium to multiples of food delivery companies listed globally.
–The divergence is due to Zomato’s stronger growth trajectory, and country-specific issues of regulatory concerns, Kotak Securities said.
-Kotak Securities values the stock at 13X FY2024 EV/adjusted sales, a significant premium to global peers.
-“… we still believe the company has legs to grow driven by non-home cooked food consumption, thereby making food services industry a large addressable market.” – Kotak Securities
-“Further, the company can explore new business adjacencies like grocery or any other type of doorstep delivery in the future, thereby providing cross-sell opportunity.” – Kotak Securities
-Zomato’s valuations have been in question since the stock began trading on the bourses.
-NYU professor Aswath Damodaran wrote in his blog that Zomato’s true value should be just Rs 41 per share.
-Billionaire investor Rakesh Jhunjhunwala said he would invest in other sectors offering better valuations.
Well placed to drive growth
“Zomato will be a key beneficiary of the steady increase in demand for food services in India,” Kotak Securities said in the report. The food delivery industry in India is still underdeveloped and with the changing preferences is likely to witness growth ahead. “We expect the industry to grow at a 28% CAGR to$10.4 billion with monthly transacting users (MTUs) growing at 19% CAGR to 45 million over FY2020-25E,” they added.
With this, the company is expected to break even by the financial year 2024-25. “Turnaround in unit economics will lead to profitability by FY2025, leaving Zomato with the bulk of its current ~US$2 bn cash balance intact, which can drive the company’s entry into fresh adjacencies enabling further value creation,” the report said.
Although Zomato currently controls half the market in a two-player market, the food-deliver industry is seeing the entry of new players. Swiggy’s Direct service is also attempting to provide lower commission plans to restaurants, according to Kotak Securities. However, they do not believe this could worry Zomato and any disruption would be small as restaurants require discovery which is possible only on platforms with reasonable traffic, and food delivery requires very swift delivery during certain daily peaks, something that Zomato and Swiggy has managed to achieve.