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zomato share price: Risk-reward not compelling enough for Zomato: ICICI Securities




the stock has corrected over 54% in the past year since the start of the year and given this significant downgrade, the national brokerage has maintained a “hold” on it with a price target of Rs 65. This signals a potential upside limit of more than 4% from the current market price.

Amid uncertainty over the Blinkit merger and its likely impact on the profitability of food aggregators, the brokerage maintained a “hold” call on the new era stock. Notably, the stock, at present, is trading at a discount of over 18% to its IPO issue price of Rs 76 per share.

The brokerage maintained that even if the company is guided to achieve EBITDA breakeven in the first quarter of FY24, it will involve very careful calibration of employee expenses and marketing expenses. “We estimate an EBITDA margin of -1.3% for FY24E,” the brokerage firm added.

ICICI Securities sees the company’s Hyperpure business or its B2B e-commerce vertical benefiting from growth across the segment. The company’s Total Addressable Market (TAM) as of FY23E is approximately $25 billion and this is expected to grow very steeply given the rate at which digital penetration is accelerating.

“We believe that B2B e-commerce is poised to reach a CAGR of around 55.8% on FY23-FY25E. Zomato’s Hyperpure business could benefit from this trend, especially given its existing business relationships with approximately 208,000 restaurants nationwide and synergistic sourcing opportunities with Blinkit,” the brokerage added.

The brokerage also considers the company’s underlying food business metrics to be steadily improving, which the brokerage says “has resulted in an improved contribution from the delivery business of food as a percentage of gross order value (reported by GOV) from 1.1% to 2.8% over the same period.As a result, Zomato reported break-even EBITDA in Q1FY23 for the business While all of these developments are positive, we believe the stock is likely to remain range-bound given the uncertainties surrounding Blinkit’s path to profitability,” the brokerage added.

Overall, the brokerage sees improving order frequency and delivery costs, improving catch rates, and accelerating hyper-pure growth as key revenue drivers for Zomato.

On a YTD basis, the stock corrected more than 54%. But according to the brokerage, the stock is still trading at a premium to most of its global peers (~7x CY22E EV/Sales vs. ~4.2x global average). The brokerage re-initiates the stock’s hedge with a ‘hold’ rating and has arrived at a DCF-based target price of Rs 65 based on assumptions of WACC of 12.5% ​​and terminal growth of 5% . “At current valuations, we believe the risk reward is balanced,” the brokerage added.

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