Jefferies downgrades Zomato to 'hold'; sees a year of consolidation after multibagger returns in 2024

Food delivery major which is also in the quick commerce (QC) space- Zomato tumbled over 5 per cent in Tuesday's session to the day's low price of Rs 251.7 apiece on the BSE. The stock has been downgraded by global brokerage firm Jefferies to 'hold' from the earlier 'buy' call. Also, the target for the Sensex-constituent has been slashed down from the earlier Rs 335 to Rs 275 apiece, implying potential gains of just nearly 4 per cent from the previous close of Rs 265.

On the previous day, the stock ended lower by 3 per cent as the Sensex ended at the lowest levels of the day.

The downgrade has been made citing aggressive competition in the QC segment, which could weigh on the company's profitability going ahead. While valuations are not excessively expensive in the context of strong execution and opportunity, we are worried about the rise in QC competition, it added.

Aggressive moves by incumbents and the entry of new players will likely result in higher discounting, which may pose a threat to medium-term profitability, said the brokerage.

Likewise, the brokerage has cut the Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) estimates for FY26 and FY27 by 12 per cent and 15 per cent, respectively. Similarly, the brokerage has also lowered profitability estimates for FY26 and FY27 by 17 per cent and 18 per cent, respectively.

EPS or earnings per share has been cut by 20 per cent for FY26 and 21 per cent for FY27.

For the QC vertical-Blinkit, the brokerage has slashed EBITDA forecast sharply over FY26E-27E; and also reduced the target multiple for the same to 6 times.

The  brokerage added that after the company's share price doubled in 2024, it foresees a year of consolidation for Zomato. In the last one year, the stock of Zomato has climbed 99 per cent, while its year-to-date return is at -5 per cent.

Meanwhile, another brokerage Morgan Stanley continues with its bullish stance on the counter with an 'overweight' rating and a target price of Rs 355, implying potential gains in the stock to the tune of 34 per cent. The brokerage underlines that the food delivery aggregator has a proven track record in respect of profitability.

The brokerage forecasts a high revenue CAGR of 33 per cent during FY25-FY27 despite elevated competition in the space. Also, it mentioned that Zomato is showing consistent market share gains in monthly active user metrics.

Hence, amid this backdrop, Zomato is Morgan Stanley's top pick in the India Internet space.
 

Zomato Q2 results

For the September quarter, the company's net profit rose 388.89 per cent to Rs 176 crore as against Rs 36 crore during the previous quarter ended September 2023. Sales rose 68.50 per cent to Rs 4799 crore in during the same quarter as against Rs 2848 crore during the previous quarter ended September 2023.