As The Share Price Of Zomato Approaches The 100 Mark, Experts Become Wary About ‘Unjustifiable’ Prices.

Zomato’s main food delivery operation, which had slowed in H2FY23, resumed robust growth in Q1FY24, growing 11% QoQ vs Nomura’s projection of 9.2% growth and high-single-digit outlook.

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Zomato’s stock price rose more than 7% on Monday after the meal delivery platform astonished the market with its first-ever net profit in the fiscal year’s second quarter. On the BSE, Zomato’s share price increased by 7.77% to a 52-week high of 102.85.

For the first time since January 25, 2022, Zomato shares surpassed 100.

Analysts think the Zomato share price surge was mostly driven by enthusiasm at the Q1 results, with the market narrative becoming positive. 

“The Zomato share price is rising as a result of the euphoria surrounding better Q1 results.” However, the organization still has a long way to go before reaching EBITDA profitability. The present share price has taken into account all of the positives for the short term. As a result, we may see profit taking in the Zomato share price after this surge,” said Avinash Gorakshakar, Director of Research at Profitmart Securities.

According to Gorakshakar, Zomato share values are still excessively expensive and do not make sense at existing prices. 

Sudip Bandyopadhyay, Group Chairman of Inditrade Capital, expressed similar concerns about the Zomato share price at these levels.

Zomato share price

“The company is on the right track and has made a small net profit.” “We would remain cautious, however, because the financials do not justify the current valuations,” Bandyopadhyay added.

Zomato declared its first-ever net profit of 2 crore for Q1FY24 on August 3, exceeding its own projection, as opposed to a loss of 186 crore year on year. The company’s sales increased to 2,416 crore during the quarter, up from 1,414 crore the previous year.

Zomato’s main food delivery operation, which had slowed in H2FY23, resumed robust growth in Q1FY24, growing 11% QoQ vs Nomura’s projection of 9.2% growth and high-single-digit outlook.

Seasonal reasons such as the summer vacation season for schools and the IPL cricket competition drove development. 

Monthly transactional users (MTUs) climbed by roughly 5.4% QoQ to 17.5 million users, up 4% YoY, according to Nomura, supported by the marketing push for Zomato Gold. 

According to Zomato, its meal delivery service may increase by 25-30% over the next two years, resulting in continuing improvement of contribution margin (CM) and adjusted EBITDA margin.

Nomura anticipates a 20% CAGR growth in its main food delivery business during FY24-25, with a CM of 7-7.5%. 

“While we acknowledge that Zomato is likely to achieve its target of 4-5% EBITDA margin (as a% of GOV) earlier than expected, we continue to believe that achieving double-digit CM with high growth in the long term will be difficult,” Nomura stated.

Zomato is rated ‘Reduce’ by Nomura, with a target price of $60 per share, representing a 41.6% drop from Monday’s high.

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Meanwhile, analysts at local brokerage company Motilal Oswal Financial Services regard Zomato’s good overall performance as a sign of an accommodating competitive climate in both the meal delivery and rapid commerce verticals. 

They feel that the meal delivery industry in India is still in its infancy, with a large runway for expansion. They predict Zomato to generate a robust 43% adjusted revenue CAGR during FY23-25, owing to its dominating market dominance and significant growth in the meal delivery industry and Hyperpure.  

Motilal Oswal now expects Zomato to turn positive on reported EBITDA by Q4FY24 and produce an EBITDA margin of roughly 5% in FY25, which should increase profitability even higher.

The company has a ‘Buy’ recommendation from Motilal Oswal, with a target price of 110 per share.

Zomato shares were trading 5.56% higher on the BSE at 100.74 per share at 12:35 p.m.

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