Kotak Institutional Equities, on the other hand, believed that the recent sharp correction offered a buying opportunity.
The national brokerage said a sharp decline in Zomato’s share price, which has fallen 27% over the past two trading sessions, appears to be tracking lower global tech stock prices, even if there is no change in the fundamentals.
The data showed stock prices of food delivery stocks such as DoorDash are down 25% year-to-date. Delivery Hero is down 30.3% and Deliveroo down 24.1% over this period.
Kotak said India’s food delivery market has stabilized into a two-player market, with Zomato and Swiggy controlling almost all of it. Swiggy’s gross merchandise value (GMV) for food delivery was $984 million in the first half of 2021. Zomato’s food delivery GMV in the same period was $1.05 billion, which which indicates a gain in market share by Zomato over the period.
“Although we do not yet have data for periods after H1CY21, we note that no new competitors have entered the market and do not expect a marked difference in market shares relative to H2CY21,” said said Kotak.
With $1.9 billion in cash as of September 2021, Zomato remains well capitalized to fund its losses and make new investments in Grofers, Kotak said.
“We continue to buy the stock as we believe the food delivery sector offers solid long-term growth potential. Cities with higher restaurant density experience much better contribution margins than nascent cities; their relative composition may impact near-term margins, although we maintain our expectation of Zomato reaching Ebitda breakeven by FY2025 adjusted for ESOP expenses,” he said. while suggesting a target of 170 rupees.
JPMorgan isn’t too optimistic. While it suggests the stock’s plunge is due to macro factors that have driven a global tech selloff, an inverted DCF suggests the stock is valued at 12.2% WACC (cost capital-weighted average).
The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets.
JPMorgan said Zomato’s sensitivity to WACC’s assumptions is sharper and said Zomato may have more downside scenarios than upsides, adding it’s too early to bottom out.