Zomato share catches brokerages attention as it achieves break-even point in EBITDA

Zomato, which recently celebrated its first anniversary of going public in July 2022, has significantly reduced investors’ wealth since its listing. It only moved up for a short time after listing and has since corrected dramatically to the point that it is where it was trading at a third of its listing or issue price. When downgrading the shares of Zomato in June and July, nearly all mutual funds and brokerages had identical opinions on the company’s stock.

Mutual fund managers, however, had conflicting opinions about Zomato in August despite having accumulated stock in the company in July. However, over the course of the month, mutual funds bought around 11 crore shares of the company. Twelve of the 20 fund houses that traded Zomato shares were net sellers, with the remaining 8 buyers. As two of the 8 buyers bought shares in large quantities, the conclusion was that they net bought shares of over 11 crores, despite heavy selling.

The largest purchaser, Mirae Asset, bought 9.47 crore outstanding shares. Franklin Templeton increased its holdings in Zomato by about 1.18 crore shares. According to data gathered by East India Securities, other significant buys included ICICI Prudential Mutual Fund, Motilal Oswal Mutual Fund, and UTI Mutual Fund. These fund houses’ optimism for the company is due to a stronger outlook for its business as a result of an increase in revenue. Additionally, Zomato’s primary revenue source, food delivery, achieved break-even EBITDA status.

Brokerages have started recommending Zomato Shares to clients

Recently brokerages have also shown interest in the Zomato’s stock and considered it worth recommending to their clients. Some have even increased the stock target price recently, including Kotak Securities and Jefferies.

Garima Mishra of Kotak Securities said, “We raise our average order value (AOV) assumptions for FY23-25 and beyond as we recognise that the impact of lower proportion of family orders post-Covid has been completely offset by food inflation and propensity to order from better quality restaurants by top cohorts.”

This bullishness can also be seen on the chats, as the stock post making all time low of Rs 41 close to its anniversary, has risen significantly and is currently trading close to 60 levels. On the stock, Dalal & Broacha has set a target price of Rs 79. The stock is valued at Rs. 100 by Jefferies and Rs. 85 by Kotak Securities.

Chart of Zomato for the last one year. The stock briefly jumped to 165 levels in a November 2021 followed by a sharp decline to lowest point at levels of 40 in July 2022.

Chart of Zomato since the start of 2022. It has been in a downtrend since the beginning of the year and has witnessed a bounce in the last two months.

HSBC kept its buy recommendation on Zomato and set a target price of Rs 85, representing a gain of more than 34% from the price of Rs 63 on September 21. It recommended that the profitability improvement trend will continue. It believes Zomato will reach EBITDA break-even by the middle of 2023E. “Now, Blinkit is going beyond groceries. It continues to be optimistic about a hyperlocal business’s long-term prospects, “the note stated.

However, not all the market participants carry the same sentiment because few considered it much wiser to book profits, if not entirely then at least partially. Among the mutual funds that sold more than a lakh shares each were HDFC Mutual Fund, IDFC Mutual Fund, Nippon Mutual Fund, and SBI Mutual Fund. Their opinion is also justifiable given the fact that Zomato shares are trading significantly below the all-time high.

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Zomato also the biggest food delivery apps as per ETC group report

 According to a study by the Canadian global research firm ETC Group, Swiggy and Zomato, two Indian food delivery services, are among the largest e-commerce meal delivery services in the world.

In the study “Crisis Profiteering, Digitalization and Shifting Power,” Zomato came in at number 10 and Swiggy at number nine. Meituan, a Chinese company, is ranked first, followed by Deliveroo, a huge UK company. Uber Eats (United States), Ele.me (China), DoorDash (United States), and others are among the other meal delivery services on the list.

Zomato’s consolidated revenue climbed 67.4% YoY to Rs. 1,414 crores in Q1FY23, driven by an increase in revenue per order and a gain in gross order value (GOV) of 41.6% YoY to Rs. 6,430 crores. Contribution as a % of GOV grew from 1.7% in Q4FY22 to 2.8%. Additionally, to reach Rs 1.67 crores, the average monthly transactions increased 35.8% YoY. Lastly, the Adjusted EBITDA has approached breakeven thanks to a large loss reduction in the food delivery area.

Our view

Zomato has a neutral rating for fundamentals on Univest app. It further says that stock is on the bearish mode in the long term while for short term a neutral sentiment can be seen on the charts in the form of sideways trend.

Additionally, the recent increase over the past 1.5 months can be linked to big net mutual fund purchases and an increase in ratings. As a result, investors shouldn’t rush to buy Zomato shares just because they are currently trading at a significant discount to their all-time high.

Investors should put on hold investing until the company via its quarterly results states that it reaches the break-even threshold and posts positive EBITDA/Net Profit in ensuing quarters. Only then can investors anticipate a robust and sustainable breakout. Even their Blink-It company needs to reach its potential, which necessitates making strategic judgments and taking appropriate action. A wait and watch strategy would therefore be preferable.

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

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