Zomato zooms 5%, nears record high after CLSA raises target price by 22%

CLSA maintained its 'buy' rating on Zomato and lifted the target price from Rs 181 to Rs 227 per share.

Shares of Zomato hit a fresh 52-week high of Rs 159.20 on the BSE in Friday’s intra-day trade after brokerage firm CLSA maintained ‘Buy’ rating on the stock and raised the target price from Rs 181 to Rs 227 per share. 

The stock of the food aggregator platform company was trading close to its record high of Rs 169 touched on November 16, 2021. Thus far in the calendar year 2024, it has zoomed 29 per cent, as compared to 0.5 per cent decline in the S&P BSE Sensex.

In past six trading days, the stock price of Zomato has rallied 13 per cent after the company reported its third consecutive quarterly consolidated net profit at Rs 138 crore in the December quarter (Q3FY24), up from Rs 36 crore a quarter ago. The company had reported a loss of Rs 347 crore during the corresponding period last year.

In Q3FY24, Zomato's revenue from operations rose 69 per cent year-on-year (Y-o-Y) to Rs 3,288 crore, up from Rs 1,948 crore a year ago. It had reported revenue of Rs 2,848 crore in the previous quarter. 

Further, Zomato's adjusted earnings before interest, tax, depreciation, and amortisation (Ebitda), including its quick-commerce business Blinkit, were positive for the third quarter in a row at Rs 125 crore, compared to Rs 41 crore in Q2FY24.

Adjusted Ebitda margin of 5.3 per cent, meanwhile, came in ahead of analysts' estimates of around 4 per cent, primarily driven by operating leverage. Food delivery contribution margin expanded 50bp quarter-on-quarter (Q-o-Q) to 7.1 per cent, aided by the higher take rate. The management continues to expect margins to expand further due to better cost absorption on account of strong growth. 

The food delivery margin rose despite an increase in the active restaurant base and a weak demand environment. Quick commerce saw a better contribution margin, despite an accelerated increase in dark stores. According to CLSA, the adjusted Ebitda margin for food should gradually move to Zomato’s medium term guidance of 5 per cent-6 per cent while quick commerce remains on track to hit adjusted Ebitda breakeven in FY25. 

For relative valuation the brokerage firm moved to a PE-based multiple of 40.6x (30 per cent discount to our QSR multiple of 58x) on FY26 EPS of Rs 5.85. CLSA assigned a 30 per cent discount to its QSR coverage despite faster growth as Zomato is yet to prove sustainability of profit over extended periods, and there remains lingering concern over pricing power and also roll forward its valuation to FY26. 

“Our target price of Rs 227 is an equal weighted blend of our DCF valuation of Rs 213 and our PE valuation of Rs 241,” CLSA said in the stock update note. 

In CLSA’s base case, the brokerage firm said it assumes a roll-out of Zomato Everyday in a larger number of cities, driving up monthly transacting customers and order frequency for food delivery. However, even in a slower growth scenario for food delivery, with no Zomato Everyday launch, CLSA see FY26 EPS of Rs 5.36, 9 per cent lower than its base case but still 45 per cent upside on their PE based valuation, the brokerage firm said.