Zomato shares: What makes this stock a 'good buy'? Brokerage sees over 30% upside— key factors

Shares of Zomato declined over six per cent in early trade on Monday as the market opened two per cent lower amid weak global cues. Stock of the restaurant aggregator dropped 6.5% to Rs 58.10 against its previous closing price of Rs 61.90 per share on the BSE. The counter is trading at a discount of around 65% from its 52-week high of Rs 169.10, which the scrip clocked on November 16 last year, as on August 29.  

Stock of the unicorn has made a stellar debut on the bourses, opening at Rs 116 per share, higher by 52.63% on the National Stock Exchange (NSE) against the IPO issue price of Rs 76. 

Since its strong debut on the bourses, the counter has steadily declined and was trading with more than four per cent lower to Rs 59.35 per share in BSE intraday trade on Monday.  

Lately, the brokerage houses have been bullish on the counter despite recent thrashing.  

As per brokerage firm Dalal and Barocha, Zomato has the first mover advantage. It believes the increase in Gross Order Value (GOV) of the restaurant operator will help it further penetarte the high order frequency customers (Orders > 50 per annum) 

"Zomato’s GOV has grown at a 58% CAGR from FY19-FY22. This is a result of 41% (CAGR) in the number of orders delivered and 12% (CAGR) in the Average Order Value (AOV) in the same period. The growth in GOV was a result of rise in active food delivery cities from 455 in FY21 to 1000+ cities in FY22 which will give them the first mover advantage," it said.  

Increased delivery costs and spends on customer acquisition also helped the contribution margin decline in FY22 to 1.7% from 5.2% in FY21.  

The brokerage expected this to improve as Zomato focuses on increasing the customer delivery charges, improve their take rates and reduce the discounts. They have also discontinued their loyalty program, it said.  

The brokerage house was also optimistic about Blinkit acquisition. As per the brokerage, the quick commerce business is a natural extension of the food delivery business which will increase their Total Addressable Market (TAM).  

"The management continues to burn cash, while the investments have reduced as Blinkit’s losses have been coming down. The synergy will benefit in improved utilization of delivery fleet and reduce their delivery cost," it said.  

Dalal and Barocha maintained a buy tag on Zomato with a target price of Rs 79, more than 30% upside from current levels. 

"The Blinkit acquisition will grow its total addressable market and we expect them to turn profitable sooner than the street’s expectations," it added clearing apprehension about the acquisition 

Last month global brokerage Jefferies has suggested a 'buy' on Zomato, saying it is a play on growing food services industry in India as well as increasing adoption of digital commerce. It gave a price target of Rs 100 for the counter