Zomato, a loss-making company, has sparked a fierce debate on the Street over its valuation after rising as much as 70 per cent post its debut on the stock exchanges last month. “In our view Zomato is a great value stock, unlike what the Street believes it to be,” the brokerage firm said in a note released on Saturday.
The brokerage firm has initiated coverage on Zomato with a “high conviction buy” call as it bets on the online food aggregator to surprise investors on the margin front and post 46 per cent annualized growth in revenues over the next five years.
ICICI Securities has set a Street high price target of Rs 220 on the stock, implying a gain of nearly 68 per cent over the next 12 months from its current market price. Currently, shares of Zomato trade at Rs 130.6 on the BSE.
“Despite limited operational history and network effect, food-tech adoption at 16% in the Next-500 towns is encouraging. With supply interventions and stronger network effect, we see scope for further increase in adoption also given the lower restaurant density here,” the brokerage firm said.
ICICI Securities is confident that the unlocking of the economy post the second wave will only have a limited impact on key metrics of Zomato as it continues to see robust recovery for the company post the damaging effect of the first wave of the pandemic.
In a non-consensus view, ICICI Securities argued that unit economics of Zomato could see a ‘J’ curve effect wherein its pre-ESOP margins could surge to 8 per cent by 2022-23 as against the Street’s expectation of operating profit only by 2024-25.
The brokerage firm said that its price target of Rs 220 is counting on 22 million Indians ordering food from Zomato only four times a month in 2024-25. “This is a low bar given that India ‘today’ has around 35 million credit cards and 114 million Paytm transacting users who likely fall in the super user category,” the brokerage house said.
The brokerage said that if Zomato’s discount per order averages less than Rs 15, which is the current base case for ICICI Securities, and attractive adjacencies are scaled up then that could pose upside risk to its estimates and its price-to-earnings multiple of 55 time two-year forward earnings.
