Going against the evaluation of some worth investors, domestic brokerage and investigation firm ICICI Securities has termed the newly listed Zomato as a worth stock, in contrast to what the street believes it to be. Initiating the coverage of Zomato, ICICI Securities mentioned that the newly listed meals-tech giant could scale as considerably as 70% from present levels. On Monday morning, the stock was down 7%, hitting an intra-day low of Rs 129.4 apiece. Anchor investors of Zomato, who pumped in Rs 4,196 crore into the IPO last month can sell their holdings in the month-old industry debutant stock from today, ending the lock-in period.
Check live price tag: Zomato
Bucking the trend
Given that Zomato is nevertheless a loss-creating entity, ICICI Securities mentioned that PEG (Price/Earnings to Growth) ratio is a superior metric against P/E ratio for relative comparisons. “At 0.5x FY24E PEG, Zomato is significantly cheaper v/s median food services (1.9x), technology (1.8x) or consumer (2.9x) stocks. We value the stock at 55x 2-year forward P/E, in-line with median consumer discretionary multiple. Initiate coverage with Zomato as TOP-BUY in our coverage,” they mentioned.
The brokerage firm’s assertion that Zomato is a worth stock goes against some identified worth investors. Earlier, just after the listing of the stock, Aswath Damodaran, one of the world’s prime valuation gurus, valued Zomato at just Rs 41 apiece. Aswath Damodaran — the Professor of Finance at Stern School of Business, NYU — had mentioned that the stock is as well high priced, thinking about the loss-creating entity it is appropriate now. Separately, Big Bull Rakesh Jhunjhunwala had also steered clear of Zomato, saying that it was a party he was not eager to attend.
What could aid development?
ICICI Securities expects a robust 46% to 33% income CAGR more than the monetary years 2021 to 2026 and monetary year 2021-2031 offered several macro and sector tailwinds. The brokerage firm expects that their is development possible for the sector, estimating 6% adoption of meals-tech in the Next-500 towns of India. “With supply interventions and stronger network effect, we see scope for further increase in adoption also given the lower restaurant density here. However, as offices resume and corporate employees return to Top-20 cities, any change in the dynamic of these markets (where Zomato leads Swiggy in market share) needs to be closely watched,” they added.
Zomato is also anticipated to advantage from the return of the old regular. The domestic meals-tech giant, contrary to its worldwide peers such as Deliveroo and DoorDash, witnessed a sharp fall in important metrics like GOV / income in the 1st handful of months of the lockdown. “Accordingly, we expect a robust recovery going ahead,” ICICI Securities mentioned. “This bounce-back really should more than offset the unlock-led uptick in physical channel activity in the close to term. The normalisation of the typical order worth and growing bargaining energy of restaurants are important variables to watch out for.
Target price tag
ICICI Securities has a target price tag of Rs 220 per share on Zomato, more than 70% up from today’s low of Rs 129.4 per share. Our TP bets on ~22 million Indians ordering ~4 instances/month in FY25E. This is a low bar offered that India ‘today’ has ~35 million/114mn credit card/Paytm transacting customers who probably fall in the superuser category/user funnel. Likely reduced discounts than the base case (< Rs 15 / order) and scaling up in appealing adjacencies pose a important upside danger to ICICI Securities’ estimates and target multiples.