Zomato’s share value has soared 71% from its IPO value inside weeks of listing on the stock exchanges. Although numerous domestic and foreign brokerage firms think Zomato’s stock value could surge greater, HSBC has initiated its coverage of the meals-tech giant with a ‘reduce’ rating. HSBC, in a report last week, mentioned that the meals delivery sector in India is about an significant modify to the item itself — from homecooked to restaurant meals. “Which is why we think, while the long-term opportunity is real, the market may end up over-estimating growth in the near term,” they added. Today, Zomato is trading at Rs 130 per share.
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Challenges stay
HSBC analysts think that Zomato could not be for calorie-conscious consumers or valuation-conscious investors and sees 3 crucial challenges for the firm. The brokerage firm mentioned that the meals delivery sector, in contrast to most e-commerce segments, will want to see profound cultural evolution to be a achievement, maintaining in thoughts that Indians have lengthy standing inhibitions against consuming non-home cooked meals. Apart from this, HSBC mentioned that for Zomato to shift to e-grocery could not be simple, offered the money-burn that the move will involve and last the “punchy” valuations that aspect in aggressive development.
Although Zomato has enhanced its unit economics, HSBC analysts think that these levels are unlikely to sustain. “In the near to medium term (post-COVID-19), volumes may grow strongly as office orders also come back, but that would mean a lower average order value (AOVs),” they mentioned. HSBC is forecasting a 5% fall in AOV in the economic year 2021-22 and a different 6% fall in the year soon after that.
Competition not a difficulty for Zomato
In terms of competitors, analysts do not see a threat for Zomato. “We compared discounting between the two by surveying 150+ restaurants in six+ cities. Swiggy discounts more than Zomato (c300bp more), but consumers aren’t switching significantly,” they mentioned. However, HSBC mentioned that Swiggy’s aggressive discounting on its platform could effect Zomato’s marketplace share, but the proof of the identical is not significantly at this juncture.
On the other hand, competitors from Jeff Bezos’ Amazon is not seen as palpable at this stage. “Amazon as of now is only operational in Bangalore and its discounting is similar to Swiggy’s. For Amazon to take market share, then its discounting and cash burn has to be more visible. Also, the customer experience in our view in Bangalore is quite mediocre,” they added.
Valuations lofty
HSBC added that the lengthy term chance for the meals delivery sector is actual and investors could show patience in the close to term. The brokerage firm assumes a 26% CAGR gross-order-worth development in the next 10 years. “While Zomato remains a compelling story, we believe the already lofty valuations factor in very optimistic estimates, and a glance at global peers (trading at 1-1.5x 12m forward EV/GMV vs 2.5x FY25e EV/GMV for Zomato) corroborates this,” the report added. HSBC has a target value of Rs 112 per share, implying a 14% downside possible from present levels.