Zomato falls 5% on reports of CCI probe against unfair business practices

Shares of Zomato plunged to Rs 82.15 on the BSE in Tuesday’s intra-day trade on the back of heavy volume following reports that the competition Commission (CCI) on Monday ordered a detailed probe against food delivery platforms, Zomato and Swiggy, for alleged unfair business practices with respect to their dealings with restaurant partners.

The stock of food delivery company had hit a record low of Rs 75.55 on March 16, 2022. The stock had registered a record high of Rs 169.10 on November 16, 2021. Zomato had raised Rs 9,375 crore through initial public offer (IPO) by issuing shares at price of Rs 76 per share.

The counter witnessed huge trading volume of around 9 million shares on the NSE and BSE in the first half-an-hour of trade. At 09:47 am; Zomato was down 3 per cent at Rs 83.80, as against a 0.5 per cent decline on the S&P BSE Sensex.

According to a PTI report, the CCI order comes months after the National Restaurant Association of India (NRAI) asked the CCI to investigate the companies for breaching platform neutrality by providing priority to exclusive contractors.

The regulator said that "prima facie there exists a conflict of interest situation, warranting a detailed scrutiny into its impact on the overall competition between the RPs vis-à-vis the private brands/entities which the platforms may be incentivised to favour". CLICK HERE FOR FULL REPORT

In the past three months, Zomato has underperformed the market by falling nearly 40 per cent, as compared to a 0.4 per cent rise on the S&P BSE Sensex.

Zomato is India’s leading foodtech company, with an around 50 per cent market share. It started off as a restaurant search-and- discovery platform, but then ventured into food delivery. Zomato also has a dining-out business, subscription business Pro, and B2B grocery Hyperpure.

Analyst at JP Morgan has ‘overweight’ rating on the stock for four reasons. The brokerage firm expects Average Order Value (AOV) to be sustainable in the medium term as it has a low proportion of premium restaurants.

“We see a reduction in discounts from Zomato as discounts become increasingly merchant funded given rising platform power; Sustainable AOV along with reducing discounts should lead to higher contribution margins; and we see strong long-term growth led by penetration and some increase in frequency among existing cohorts, with Zomato retaining its current share of the food delivery industry with the opportunity to build a quick grocery practice that can expand its TAM,” JP Morgan said in March 24, 2022 report.

Meanwhile, the company has released the following statement on Tuesday. According to a release issued by the company, the company shall continue to work closely with the Hon'ble Commission to assist them with their investigation and explain to the regulator why all of our practices are in compliance with competition laws and do not have any adverse effect on competition in India. READ FULL STATEMENT

Tech view

Outlook: Cautious

Support: Rs 76

After a massive breakdown in Zomato's stock on January 24 this year, the shares have been trading in a narrow range since February 21. Though the stock formed a Bullish Harami candelstick pattern on the daily charts on April 1, it has been unable to trade higher owing to trendline resistance at Rs 88 level. On the downside, near-term support stays at Rs 81, which is its 20-day moving average (DMA). After this, the next support is at Rs 76 level.

The stock's price-to-moving averages action continues to favour a negative bias on the daily charts with the 20-DMA below the 50-DMA, and 50-DMA falling below the 100-DMA.

That said, the stock seems to be attempting to recover some of its lost ground, with select key momentum indicators like the RSI, suggesting room for upside. Moreover, the MACD line is attempting to cross the zero line. If that happens, market bulls may gain some control over the stock and may take it to Rs 107 level, which is its 20-week moving average (WMA).

The Directional Index and Slow Stochastic, however, suggest it will be a fight of equals between bulls and bears in the near-term.

(Inputs from Nikita Vashisht)