JP Morgan launched the Zomato hedge with an underweight stance, setting a target price of Rs 112 per share, which implies a 9% drop from the current price. Zomato’s premium valuation may not be warranted without significant leverage for the stock, global research and brokerage firm JP Morgan said while launching cover for the food delivery giant’s stock. Zomato is trading at 21x CY22 EV / Sales, which is 4 times higher than the average valuation of global food technology companies. either market share gains or AOV expansion, “analysts at JP Morgan said in a note. The brokerage firm launched the Zomato hedge with an” underweight “rating and a target price of Rs 112 per share, citing four main reasons behind the negative outlook.
Headwind for Zomato
Unjustified valuations: Zomato is currently trading at 21x CY22 EV / Sales, which is 4x higher than the average valuation of global food technology companies, JP Morgan said. “We believe that the premium is not justified because we do not see any significant levers, either market share gains or AOV expansion. We believe that with a multitude of Internet IPOs, the supply premium should disappear and the stock could correct itself given the lack of hardware stock drivers, ”they added.
Average order value to drop: Analysts believe Zomato’s Average Order Value (AOV) could signify a sharp comeback relative to cyclical factors. Currently, the AOV for Zomato is at Rs 460 (1.6x pre-covid levels) and ahead of Swiggy. JP Morgan analysts believe that any increase in frequency among existing customers is likely to come from smaller customers, while new customers in the top 50 cities (levels 2 and 3) are likely to use smaller cart sizes. where the propensity to spend is lower than the top 10. -20 cities. We believe that AOV is the most important factor influencing the contribution margin. A lower structural AOV limits the expansion of the contribution margin and would weigh on long-term profitability, ”the report adds.
Discounts to increase: Grants from Zomato have declined sharply over the past two years but may now increase again. “We believe discounts will need to rise sharply to stimulate market expansion, buy out dormant clients and retain client portfolio share as discretionary spending options increase in a reopening economy,” JP Morgan analysts noted. . The brokerage firm expects discounts to be 6% of AOV by fiscal year 2022-2023 and 4% longer term, which will hit profits.
More market share gain: The duopoly food delivery market is expected to remain the same, with Swiggy and Zomato each controlling 50% of the market. “We do not see the possibility for Zomato to expand its stake in Swiggy on a sustainable basis, as we believe the two will remain competitive to defend their market share,” analysts at JP Morgan said.
Zomato’s share price has risen 74% so far from the IPO price of Rs 76 per share to sit at Rs 132 each on Wednesday morning. The stock managed to outperform Sensex and Nifty during the said period.
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