Zomato share price has been moving downwards since the year began. So far in 2022, Zomato’s share price has tanked a whopping 40% to now trade at Rs 82.05 per share. Analysts at global brokerage and research firm HSBC have maintained their ‘Hold’ rating on the scrip, seeing 11.5% upside potential from today’s lows. Zomato has faced the brunt of investors moving away from technology stocks across the globe as the interest rate hike cycle kickstarts. HSBC has a target price of Rs 92 per share set on Zomato.
Comfortable valuations
“Concerns around sky-high growth expectations and punchy valuations have moderated, while average order values have held up better than our expectations,” HSBC said in the report. Valuations of Zomato were a concern earlier but HSBC believes a 50% fall in share price since November last year makes valuations less demanding. “Also, we believe that, unlike many other segments in the new-tech space, the food delivery industry is relatively mature with a healthy duopoly structure and clear value proposition. This should limit a further de-rating in Zomato,” they added.
The brokerage firm said it has a ‘Hold’ rating on the stock as it sees little upside potential to the Street’s gross order value estimates, especially when viewed in the context of overall discretionary consumer spending in the country.
Electrifying food delivery
Further, diving deeper into Zomato’s electric vehicle adoption, HSBC sees a profound impact on food delivery unit economics over a 10-20-year horizon. However, over a 3-5 year horizon, analysts see limited benefit. “While cheaper to run, EVs cost more to buy,” HSBC said. They added that government subsidising food delivery for EVs is hard to justify.
HSBC highlighted that the cost of running EVs is around 1/7th of a normal fuel-run scooter, a savings of Rs 1.7 per km. The delivery fuel cost today is close to Rs 12 per order for Zomato, which is around 20% of the delivery cost and around 13% of the total cost per order and around 3% of the average order value (AOV). “If all deliveries are on EVs, then the fuel bill per order would decline to around Rs 2 per order, for a savings of Rs 10 per order. This alone is 2.5% accretive to the contribution margin vs the c1% of contribution margin for Zomato today,” HSBC said.
The biggest challenge seen in EV adoption for deliveries is the initial capital requirement for the rider to buy a new vehicle. HSBC noted that a rider will have to spend at least Rs 30,000-40,000 more to buy a “reasonable EV” suitable for delivery.