JP Morgan has initiated coverage of Zomato with an underweight rating, pinning a target cost of Rs 112 per share, implying a 9% downside from the existing cost. Zomato’s premium valuation may well not be justified with no considerable levers ahead for the stock, stated worldwide brokerage and investigation firm JP Morgan even though initiating the coverage of the meals delivery behemoth’s stock. “Zomato trades at 21x CY22 EV/Sales which is 4x higher than the average valuation of global food tech companies. We believe the premium is not justified as we don’t see significant levers – either market share gains or AOV expansion”, analysts at JP Morgan stated in a note. The brokerage firm has initiated the coverage of Zomato with an ‘underweight’ rating and a target cost of Rs 112 per share, citing 4 important factors behind the adverse outlook.
Headwinds ahead for Zomato
Valuations not justified: Zomato is presently trading at 21x CY22 EV/Sales which is 4x larger than the typical valuation of worldwide meals tech businesses, JP Morgan stated. “We believe the premium is not justified as we don’t see significant levers – either market share gains or AOV expansion. We believe with a slew of internet IPOs lined up the supply premium should vanish and the stock could correct given absence of material stock drivers,” they added.
Average order worth to fall: Analysts think the typical order worth (AOV) of Zomato could imply revert sharply from cyclical variables. Currently, the AOV for Zomato is at Rs 460 (1.6x pre-covid levels) and ahead of Swiggy. JP Morgan analysts think that any frequency raise in current clients is probably to come from reduced-ticket size clients even though new costumers from top rated 50 cities (tier 2 and 3) are probably to use reduced basket sizes exactly where propensity to invest is reduced than top rated 10-20 cities. We think AOV is the single largest element which has an influence on the contribution margin. Lower structural AOV restricts contribution margin expansion and would weigh on lengthy term profitability,” the report added.
Discounts to raise: Subsidies provided by Zomato have decreased sharply more than the last two years but could now raise once more. “We believe discounts will need to rise sharply to drive market expansion, reacquire dormant customers and retain customer wallet share as discretionary spending options rise in a reopening economy,” analysts at JP Morgan noted. The brokerage firm expects discounts to be 6% of AOV by the monetary year 2022-23 and 4% in the longer run, hitting income.
No more marketplace share get: The duopoly meals delivery marketplace is anticipated to stay the identical with Swiggy and Zomato controlling 50% of the marketplace every single. “We don’t see scope for Zomato to expand its share over Swiggy on a sustainable basis as we believe both will remain competitive to defend their market shares,” JP Morgan analysts stated.
Zomato’s share cost has rallied 74% to date from the IPO cost of Rs 76 per share to sit at Rs132 apiece on Wednesday morning. The stock has managed to outperform Sensex and Nifty for the duration of the stated period.
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