After brokerage firm Macquarie reiterated its “underperform” rating and set a price target of ₹130, food delivery behemoth Zomato Ltd. finds itself in a difficult position. The investing community is taking notice of this value, which implies a possible 50% decline from the present market levels.
Macquarie has voiced concerns in its most recent study over Zomato’s growth assumptions, unit economics, and competitive landscape, particularly with regard to its primary Food Delivery business and the Blinkit fast commerce segment.
Credits: Hindustan
Growth Assumptions Under the Spotlight
Macquarie’s report questions Zomato’s ambitious projections for its Gross Order Value (GOV), which currently forecast a CAGR of 18%-35% over the next decade. These estimates factor in:
- Fully optimized margins.
- A competitive landscape that remains benign over the long term.
- The brokerage views these assumptions as overly optimistic. As the food delivery market matures, growth could decelerate, and heightened competition from players like Swiggy and smaller niche platforms might pressure Zomato’s profitability and market share.
“While Zomato has been a pioneer in the Indian food-tech space, long-term growth at this scale will require sustained innovation, stronger market penetration, and operational efficiencies,” Macquarie noted.
Financial Performance: Mixed Bag in Q2 FY24
Zomato reported a net profit of ₹176 crore for the July-September quarter, a substantial improvement from the ₹36 crore posted in the same quarter last year. However, the profit fell short of Jefferies’ estimates of ₹245.3 crore, signaling challenges in achieving higher-than-anticipated profitability.
Similarly, adjusted revenue grew 69% year-on-year to ₹4,799 crore, but again missed analysts’ projections of ₹5,042.7 crore. Despite the revenue growth, Macquarie believes that Zomato’s profitability metrics could face significant headwinds if growth expectations for Blinkit and its core food delivery vertical are not met.
Blinkit and Quick Commerce: The Achilles Heel?
Zomato entered the rapid commerce market in 2022 when it acquired Blinkit, but the endeavor has not been without difficulties. Wafer-thin margins and the fierce competition in this market have sparked questions about how long growth can last.
Macquarie emphasized the necessity of reassessing Blinkit’s unit economics because the market is still dominated by fierce competition from companies like BigBasket, Swiggy Instamart, and Zepto.
Due to competitors’ aggressive undercutting, securing client loyalty is challenging in the capital-intensive rapid commerce sector. Blinkit’s contribution to Zomato’s profitability may continue to be modest in the foreseeable future if there are no noticeable increases in operational efficiency.
Optimism vs. Reality: Is Zomato Overpriced?
Macquarie’s pessimistic outlook stems from the market pricing in a rosy growth narrative for Zomato. The brokerage argues that current valuations assume a smooth runway for growth, which may not align with the realities of the market.
Moreover, rising customer acquisition costs and an uncertain competitive landscape are likely to weigh on Zomato’s long-term prospects. The brokerage also warned that reliance on optimized margins to justify valuations is risky, especially in a dynamic sector like food tech.
What Lies Ahead for Zomato?
Despite Zomato’s spectacular ascent to prominence in India’s food-tech industry, there are still issues. As the business deals with the slowing growth of food delivery and the growing difficulties in rapid commerce, investors may need to lower their expectations.
Conversely, Zomato’s persistent attempts to increase profitability and diversify into related services may open doors for sustained expansion. Over time, the company’s efforts to improve delivery operations, use data analytics, and fortify its brand position might pay off.
Final Thoughts
The dangers associated with Zomato’s present valuation are highlighted by Macquarie’s “underperform” rating and significant price target decrease. Even though the business has achieved remarkable profits, its long-term performance may be hampered by its ambitious growth projections and the fierce competition in the quick commerce market.
Investors in Zomato are currently faced with a choice: stick with their investments, believing that the company can generate steady growth, or follow Macquarie’s cautious approach, which suggests that the stock price is too high. It will take time to determine this food-tech giant’s actual course.
