Zomato Shares Rally Over 18% As Q1 Loss Narrows; Should you Buy, Sell or Hold?

Zomato Shares Rise: Shares of Zomato soared over 18 per cent in Tuesday’s trade after the online food delivery platform said its consolidated net loss narrowed in the June quarter. The food tech player posted a consolidated loss at Rs 186 crore for the quarter ended June 30, 2022, as compared to a loss of Rs 361 crore in Q1FY22. Revenues during the quarter jumped 68 per cent year-on-year to Rs 1,414 crore.

Zomato’s adjusted Ebitda loss for the April-June quarter of the fiscal was down to Rs 150 crore from Rs 170 crore in the year-ago period. “Now that the Zomato-Blinkit deal is approved, we have three companies — Zomato, Blinkit and Hyperpure — in the order of business size/impact. In addition to these three, we also have Feeding India. We are now at a stage of life where we are maturing from running (more or less) a single business to running multiple large companies,” Deepinder Goyal, founder and CEO of Zomato, wrote on the company’s Slack channel last week.

What Should Investors Do?

“In our recent note, we highlighted the management focus on path to profitability. 1QFY23 results now suggest that we underestimated the urgency, as adj. Ebitda loss came at a low of ₹1.5 bn, with break-even at food delivery. Heartening to see this is despite a double-digit QoQ growth in GOV,” said global brokerage Jefferies.

Following Zomato’s results, Kotak Institutional Equities has lowered its FY2023-25 loss estimates. The brokerage sees the fair value of the stock at Rs 80 now against Rs 79.

“Q1 reinforced confidence on Zomato’s core business with food ordering adjusted revenue growth at 14.8% QoQ, with adjusted EBITDA break-even earlier than anticipation. Continued traction in Hyperpure (up 40% QoQ) aided overall revenue growth. While we like Zomato’s core business, we remain cautious on its quick commerce foray, given higher competitive intensity, unclear profitability roadmap, more complex operation and smaller TAM,” said brokerage Ambit. It has Buy rating on Zomato shares with a target price of ₹103 apiece.

Indications of cash conservation and no more minority investments give us comfort on adequacy of cash reserves (USD 1.4 bn in 1Q) until overall business turns EBITDA positive, Ambit’s note added.

Morgan Stanley has kept an overweight rating on the stock with a target price of Rs 80.

Morgan Stanley sees results as a good quality beat, driven by a healthy increase in MTUs, and sees steady to improving AOVs and better monetisation. The company is break-even at the segment level for food delivery, while sustained and steady execution over coming quarters will be key for re-rating, it said.

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