Zomato share price jumped nearly 5 per cent today, rising to a fresh record high of Rs 147.80 apiece intraday on NSE. The online food delivery platform stock price is now 95 per cent up from its IPO price of Rs 76 per share. From the current levels, Zomato share price is likely to rally 12 per cent more, Swiss brokerage UBS Securities said in a report. UBS Securities has initiated a ‘buy’ rating to the stock with a 12-month target price of Rs 165 per share. “As one of the two leading players in the rapidly growing food delivery market in India, we expect Zomato to deliver over 40 per cent revenue CAGR making it one of the fastest-growing internet companies in the region,” UBS Securities said.
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Zomato stock was listed at Rs 115 apiece, last week; since then it has surged 28.52 per cent. In traded volume terms, 56.90 lakh shares have exchanged hands on BSE, while a total of 8.14 crore units have traded on NSE so far. UBS in its report also highlighted that not only did online food delivery get a boost globally last year, factors such as smaller family sizes, lesser time and willingness to cook and increasing affluence also provide favorable long-term growth tailwind for online food market in India. “Unit economics are still evolving and competition from restaurants’ self-built platforms/non-delivery platforms such as Thrive, Dotpe will increase; a fragmented eco-system will utimately allow aggregator-platforms to capture a lion’s share of traffic.
Even as valuations are not cheap at FY24e EV sales of 17x, superior growth leaves room for upside, it added. India has a total of 10 million active users and 50-70 million total online orderers, UBS believes India has a long runway for growth. UBS Evidence Lab survey of November 2020, showed that 80 per cent of those who had not ordered online are likely to do so going ahead.
UBS noted three changes in FY21 that helped Zomato achieve positive contribution. Firstly, increase in AOV (average order value) from Rs 250-270 pre-COVID to Rs 350-400 as multi-use orders increased. Secondly, reduction in discounts from 8 per cent of AOV to 2-3 per cent, and partial shift of delivery charges to consumers (Rs 10-20 to Rs 30-40 per order). While some of these could reverse post-COVID, UBS believes a reduction in discounts and passing of delivery charges are signs of a maturing market. Thirdly, 25 per cent of costs are fixed in nature, driving operating leverage with scale.
Zomato’s FY24e EV to sales of 17x compares with 2-9x for global food delivery businesses although its growth is higher at 40-50 per cent vs 20-30 per cent for other platforms, it added. “In e-commerce, EM platforms such as Sea, MELI, Allegro trade at a premium to Chinese and DM peers due to superior growth rates,” UBS said.