Why brokerages are bullish on Zomato post Q2

Zomato shares rose 3% to ₹263.90 on Wednesday as investors cheered its September quarter earnings report, which came broadly in line with Street expectations. The sentiment was further boosted after its quick commerce arm, Blinkit, grew at a very healthy pace on the back of accelerated store expansion done over the last three quarters. Supported by strong growth and significant room for margin expansion across all its business segments, many brokerages have maintained ‘Buy’ calls on the foodtech company, expecting the stock to rise up to 28% from the current level.

For the second quarter ended September 30, 2024, Zomato reported multifold growth in its consolidated net profit to ₹176 crore, compared to ₹36 crore in the year ago period. The revenue from operation surged 68% year-on-year (YoY) to ₹4,799 crore, driven by improvement in margins in the food delivery business and expansion of its quick-commerce business. On the operating front, EBITDA stood at ₹230 crore, while the margin was at 4.7%, up 50 basis points quarter-on-quarter (QoQ).

Food delivery business delivered over 20% YoY growth in gross order value (GOV) and revenue with steady margins. In Q2FY25, food delivery GOV was at ₹9,690 crore, growing by 4.6% QoQ and 21.4 % YoY. The adjusted revenue of the food delivery business was ₹2,340 crore, up 3.7% QoQ and 20.7% YoY.

On the other hand, Blinkit’s GOV grew 24.6% QoQ and 122.2% YoY to ₹6,130 crore, aided by 152 stores net additions during the quarter. Quick-commerce’s adjusted revenue was ₹1,160 crore, up 22.7% QoQ and 128.9% YoY.

Zomato has also proposed to raise ₹8,500 crore via a qualified institutional placement (QIP) of shares amid rising competition in the quick-commerce space. The fundraising announcement came at a time when rival Swiggy is gearing up to launch its initial public offering (IPO). The Swiggy IPO is a combination of fresh issue of equity shares worth ₹3,750 crore and an offer-for-sale of 185,286,265 equity shares by existing shareholders. 

This capital raise will ensure Zomato maintains financial flexibility, allowing it to continue scaling Blinkit while countering competitive pressures effectively, says Motilal Oswal in a note. “It will also allow Zomato to change its ownership structure in favor of Indian investors – this should allow the company to hold inventory in its quick commerce business.” 

Analysts remain bullish on Zomato

Zomato continues to remain one of the preferred stock among new age companies. From Motilal Oswal to JM Financial to ICICI Securities and Nuvama, all brokerages have given ‘Buy’ calls on the stock.

Motilal Oswal has retained ‘BUY’ rating on the stock, with a target price of ₹330, suggesting a 28% upside from the current price. “Zomato’s food delivery business is stable, and Blinkit offers a generational opportunity to participate in the disruption of industries such as retail, grocery and e-commerce.”

JM Financial has also maintained ‘BUY’ with a price target of ₹300, saying that Zomato remains one of the fastest growing consumption names with significant room for margin expansion across all its business segments. “Unless there is irrational rise in competitive intensity in Quick Commerce, we expect the company to deliver very strong earnings growth.” On fundraising, the brokerage house says that the capital could be used as a war chest to deter competitors from aggressive discounting/incentives.

ICICI Securities has given ‘BUY’ on the stock with a target price of ₹300, saying that it remained top pick in the Indian internet space. Nuvama also remained bullish on the stock and retained ‘BUY’ with a price target of ₹325 from ₹285 earlier.

“Zomato continues to push the paddle of growth across its business. We expect Blinkit dark store addition to be faster than initially expected—hence growth shall be even faster while profitability would be delayed due to higher upfront cost thereof, which, in our view, is the right strategy in a cut-throat QC market,” Nuvama says in a note.

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