Zomato’s Share Price Rally Is not over Yet, JM Financial Initiates Coverage on Zomato with ‘Buy’

Zomato’s IPO listing and subsequent rally, which has been stellar so far, hasn’t yet run out of steam. JM Financial became the second brokerage firm UBS Securities India to accredit Zomato with a “buy” rating, pegging nearly 25% upside potential to put the target price at Rs. 170 per share.

A Brief Overview of the Zomato IPO

Zomato listed a fresh issue of shares worth Rs. 9,000 crores and an OFS of Rs. 375 crores by Info Edge on both the NSE and BSE. This IPO was worth Rs. 76 per equity share with a minimum market lot size of 195 shares and a maximum application of 2535 shares.

It quickly became the largest IPO of the current year as it received an overwhelming response from investors with an over-subscription rate of 38.25 between 14 and 16 July 2021.

On 23 July 2021, Zomato became the first Indian unicorn to go public. Its shares made a strong debut, closing at Rs. 126 per share on the NSE, with the stock price climbing 66% from the IPO price band. On the BSE, its shares closed 65% higher than the initial price at Rs. 125.85 apiece.

At the end of 2 August 2021, Zomato stocks closed at Rs. 138.45 per share, nearly doubling initial investors’ money.

An Even Higher Target Price for Zomato Shares

Most brokerage firms that rated the Zomato stock a “buy” peg a more than 17 – 20% gain in one year from its BSE closing price of Rs. 141 on 29 July 2021. However, experts suggest that Zomato stocks hold significant growth potential, justifying the premium price.

Following this, the Swiss brokerage USB initiated coverage of Zomato with a buy rating and target price of Rs. 165. They expect the food delivery service to clock a CAGR of over 40% in revenue as it’s still in the nascent stage compared to its global peers.

On its heels, the domestic brokerage firm JM Financial announced its 12-month target price of Rs. 170. It expects Zomato to register a 48% compounded revenue growth in its food delivery business. They also expect Zomato’s Hyperpure business to ramp up considerably with an annual growth rate of 59% in a year.

For their forecast, JM Financial valued Zomato’s business at 11 times the enterprise’s worth to adjusted sales by March 2030 and discounted the valuation for September 2022. With India’s hyperlocal delivery ecosystem on the rise, they expect Zomato to leverage its growth opportunity as well as explore adjacent avenues.

Zomato May be Profitable by FY26

According to JM Financial, Zomato will likely reach profitability by fiscal 2026. This will come about with a growing number of millennials or Gen Zs in the earning population and wider acceptability of e-commerce in regions beside Tier-I cities.

Increasing loyalty from restaurants and customers and accessible opportunities in a broad addressable market will also help Zomato scale its Hyperpure business.

JM Financial opines that Zomato will start churning out positive operating profit from FY25 on a cash EBITDA basis. However, its annual order volumes will have to hit 1 billion, and its contribution margin has to rise to Rs. 21 per order. In the previous financial year, Zomato delivered around 239 million orders with a contribution per order of Rs. 20.5.

Though the contribution per order may decline sharply in the short term, following the end of pandemic-driven profits, the brokerage firm thinks it will improve in the long term. Aided by a higher market share and expansion of the addressable market, they expect the profits to start coming over the next few years.

Bottom Line

Since its opening on 14 July 2021, Zomato share prices have nearly doubled in their value, yielding significant profits for initial investors. Though most experts presently don’t expect more than 17 – 20% gain, the brokerage firm JM Financial estimates otherwise. They expect the firm to register a CAGR of 46% in overall revenue by FY26.

At Monday’s closing, Zomato’s share prices stand at Rs. 138.45. As the growth curve of Zomato shares appears to have flattened, investors need to exercise extra caution while investing in these shares. Prices at this stage can fluctuate, and unprepared investors can easily make a loss.

 

Frequently Asked Questions

1. When was the Zomato IPO listed?

Zomato IPO was listed at both the NSE and the BSE on 23 July 2021.

2. What was the reason behind Zomato listing its shares?

Zomato had two primary objectives behind listing its IPO –

• Meeting general corporate purposes
• Funding organic and inorganic growth

3. Can I buy the Zomato IPO now?

The IPO was open from 14 July 2021 to 16 July 2021. Now the shares are traded by investors on the NSE and BSE.