Zomato’s premium valuation here to stay; Jefferies initiates coverage, check rating, target price

Apart from food deliveries, Zomato also offers a subscription service called Zomato Pro, and an ingredient supply business called Hyperpure.
(Image: REUTERS)

Zomato’s share price continues to gain as it enters the second week of trade since its blockbuster listing on the stock exchanges. Valuations might be considered freakishly high by some but analysts at global brokerage and research firm Jefferies are taking none of it as the brokerage firm initiates coverage of Zomato with a ‘buy’ rating and a target price of Rs 170 per share. “Valuation for Zomato at c.15x FY23 EV/gross sales compares with 2-12x for regional/global peers, which has to be viewed in the context of a longer growth runway, premium enjoyed by Indian stocks across consumption categories & scarcity premium,” Jefferies said in a report.

Check live price: Zomato 

Zomato entered the market at a fixed price band of Rs 72-76 per share. After listing at Rs 115 per share the stock has continued to move higher. Today Zomato’s share price is at Rs 135 per share, 78% above the higher end of the IPO price band. 

Breakeven by 2026

“Zomato listing is a watershed moment in the Indian internet space. Strong food delivery opportunity should drive 45% revenue CAGR over FY21-26E, supported by other segments,” Jefferies said. The brokerage firm said that food delivery is a compelling opportunity within India’s attractive food services market. Although Zomato is still a loss-making entity, Jefferies forecasts EBITDA breakeven by the financial year 2025-26 adding that Zomato’s focus should be on growth and profitability would follow. 

Post pandemic, Jefferies said that beyond the current financial year they forecast higher Ebitda loss at Rs 800 – 1,100 crore. “We build in Ebitda break-even by the financial year 2025-26 and note that profit before tax break-even will be earlier due to high cash on the book. Our base case builds in minimal drag from new initiatives (grocery, nutraceutical),” the added. Zomato has $2 billion cash on books, according to Jefferies. The company runs an asset-light model with modest working capital and Capex requirements.

Other business growth

Apart from food deliveries, Zomato also offers a subscription service called Zomato Pro, and an ingredient supply business called Hyperpure. For the latter, a 55% revenue CAGR has been predicted by Jefferies over the financial years 2021-2026 while for the premium offering of Zomato pro revenues are expected to bounce back next fiscal year.

Target price and valuation

“We value the delivery franchise at 2.5x FY26E GMV, dine-out/ Zomato Pro at 10x FY26 revenues and Hyperpure at 1x FY26E revenue. We discount it back to arrive at a 12M PT of Rs 170. On our 12M PT, the stock would trade at 20x FY23 EV/gross sales and imply 5.7x GMV in food delivery business,” said Jefferies. Significant cash on books may drive aggressive investments, disruption from third Covid wave, and increased competition, are some of the key concerns around Zomato seen by Jefferies. 

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