Zomato Shares Gain Over 7.5% As Morgan Stanley, Goldman Sachs Initiate Coverage

A Zomato delivery executive. (Photo: Zomato Website)

Zomato Shares Gain Over 7.5% As Morgan Stanley, Goldman Sachs Initiate Coverage

Shares of Zomato Ltd. gained more than 6% after Morgan Stanley and Goldman Sachs highlighted the food aggregator’s potential to expand into new, adjacent categories such as restaurant supplies and grocery, and its dominant market position, among others.

While Morgan Stanley initiated coverage on the online food delivery platform with an ‘equal-weight’ stance, Goldman Sachs rated it a ‘buy’, according to their research reports.

The financial services providers, however, cited an increase in competition and regulatory changes as key concerns for the company.

Here’s what Morgan Stanley and Goldman Sachs have to say about Zomato...

Morgan Stanley

  • Initiated coverage with ‘equal-weight’ stance, and a target price of Rs 140, implying a potential upside of 12%.

  • Zomato has strong business moats — market leadership in a fast-growing and underpenetrated market — with potential to add new adjacencies. However, the research house views risk-reward as balanced at the current stock price.

  • It’s an attractive opportunity as the company has turned contribution margin positive and steady state margins are likely to be in line to better than global peers, despite lower average order value.

  • With scale, the platform offers potential for new adjacencies, such as hyperlocal grocery delivery, which itself is a multibillion dollar market opportunity.

  • Zomato’s content-led strategy (reviews, ratings, user-generated content) makes it a good restaurant discovery platform for consumers and also creates engagement levels.

  • The subscription model not only creates greater repeat behavior but also provides additional avenues of monetisation.

  • On the supply side, Zomato is building deeper relationships with restaurants along with alternative monetisation models beyond food delivery (hyperpure — supply of grocery, packaging material to restaurants, dining out — ad sales, restaurant discovery platform).

  • Third-party app download data points to improving momentum for Zomato in its share of incremental app downloads in the food delivery category, implying a steady share in a competitive market.

  • Concerns on the impact of Covid on restaurant food consumption, pick up in competitive intensity and potential regulatory changes remain.

Goldman Sachs

  • Initiates coverage with a ‘buy’ rating, and a target price of Rs 180, implying a potential upside of 44.4%.

  • Despite being a relatively late-entrant, Zomato has captured half of India’s online food delivery market, driven by its strong execution, large restaurant review platform, and initial focus on less competitive cities.

  • Zomato is well-positioned to grow its share of the $155-billion food services total addressable market in FY30.

  • Expertise in food delivery will help Zomato enter and expand into adjacent categories such as restaurant supplies and grocery, aiding overall growth and profitability.

  • Expects Zomato to be Ebitda profitable by FY24E, driven by a larger scale, higher take rates and improving rider efficiency.

  • While Zomato trades at a premium valuation vs global food delivery peers, Zomato’s gross order value growth profile at 46% FY21-25 CAGR is superior vs global peers.

  • Investors will be willing to pay a premium valuation for Zomato as long as the company is able to maintain an elevated growth profile and a dominant market position.

  • Sees Zomato’s strong balance sheet providing it the ability to expand into new/adjacent categories. Key risks to this include increased competitive intensity, regulatory challenges.

Shares of Zomato gained 7.6% to Rs 134.15 apiece as of 3:15 p.m. on Monday. Of the eight analysts tracking the stock, five have a ‘buy’ rating, one suggests a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies an upside of more than 20%.

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