But, this is not the end, believe analysts. In the first initiation of coverage on the counter, analysts at UBS said the stock can hit Rs 165 per share mark in the next 12 months, meaning an upside of about 20 per cent from last close and over 117 per cent higher from the issue price.
This is in contrast to some of the sceptics, including Rakesh Jhunjhunwala and Raamdeo Agrawal. Valuation guru Aswath Damodaran believes Zomato shares are worth as low as Rs 41.
Navin Killa of UBS, who along with his team wrote the report on Zomato, said being in a duopoly market, the company is expected to deliver over 40 per cent revenue CAGR (compounded annual growth rate), making it one of the fastest growing internet companies in the region.
“Not only did online food delivery get a boost globally in 2020, secular factors such as smaller family sizes, lesser time and willingness to cook and increasing affluence also provide a favourable long term growth tailwind for online food market in India,” said Killa.
He seems to be extremely bullish on Indian food delivery market, a thought that has been echoed by many others. He believes the gross order value of the market will increase at a compounded rate of 43 per cent.
The topline and bottomline of Zomato improved due to the pandemic, the company claimed in its IPO prospectus. However, it remains a fact that the company is continuously burning cash. And, it may keep doing so, the company has indicated.
“We are going to relentlessly focus on 10 years out and beyond, and are not going to alter our course for short term profits at the cost of long term success of the company. The tremendous response to our IPO gives us the confidence that the world is full of investors who appreciate the magnitude of investments we are making, and take a long term view of our business,” said Deepinder Goyal, the founder of Zomato.
Expensive, but please buy!
Analysts at UBS accept that the stock is expensive, especially after a strong debut on the bourses. Compared to 2-9 times for its global peers, Zomato trades at 17 times expected FY24 EV to sales.
However, what puts it apart from the rest is its superior growth. At an expected growth rate of 40-50 per cent, it will clock almost double the rate of 20-30 per cent of other platforms, the analysts said, justifying their price target.
Killa also said improving unit economics with contribution margin turning positive in FY21 increases the investment profile of the company. He outlined over 30 per cent Ebitda margin for Zomato in the medium term.
In Mumbai trading on Tuesday, the stock gained nearly 4 per cent to Rs 146 on BSE.
