Foreign brokerage firm CLSA has reaffirmed its ‘Buy’ rating on Zomato Ltd, highlighting the company’s rapid growth compared to its competitor, Swiggy. CLSA has set a target price of Rs 248 per share for Zomato, reflecting confidence in the company’s performance and market position.
Since May 2023, CLSA has been progressively increasing its price targets for Zomato, starting from Rs 80. The latest analysis shows that Zomato is outpacing Swiggy on several key metrics. Swiggy’s overall gross order value (GOV) growth for FY24 stood at 26% year-on-year (YoY), while Zomato’s combined food delivery and quick-commerce verticals grew by 31% during the same period.
In terms of revenue, Swiggy’s overall growth was 24% YoY, whereas Zomato achieved an adjusted revenue growth of 35% YoY. It is worth noting, however, that Swiggy’s revenue figures include some B2B sales, making a direct comparison challenging.
CLSA noted that Swiggy’s core food delivery GOV grew in double digits for FY24, compared to a 19% YoY growth in Zomato’s food delivery GOV. If Swiggy’s food delivery GOV growth is assumed to be between 10% and 20%, it would represent 74% to 80% of Zomato’s food delivery GOV for the January-December 2023 period.
Other metrics also favor Zomato. As of December 2023, Swiggy had 387,000 active delivery partners, while Zomato had 419,000. In terms of dark stores, Swiggy Instamart operated 487 active dark stores as of December 2023, compared to Blinkit’s 526 active stores as of March 2024.
Despite these positive indicators, CLSA acknowledged potential investment risks for Zomato. These include subdued urban consumer sentiment, high competitive intensity, and regulatory challenges. Additionally, significant consumer adoption of the Open Network for Digital Commerce (ONDC) network could negatively impact Zomato’s take rates.
CLSA values Blinkit, Zomato’s quick-commerce arm, at a 30% discount to its 67 times price-to-earnings (PE) multiple used for DMart. This discount is justified due to DMart’s higher profitability and more stable business model.
“For our target price’s other half, we base our discounted cash flow (DCF) on 25 years of explicit forecasts to better model the growth opportunity for consumption in India,” CLSA stated. “We believe low penetration levels, rising incomes, and a young population offer a long runway for sales growth. We discount our cash flow assumptions at a weighted average cost of capital (WACC) of 14.4% and use a 4% terminal growth rate beyond our explicit forecasts.”
Overall, CLSA’s analysis underscores Zomato’s robust growth trajectory and strategic positioning in the market, making it a compelling investment opportunity in India’s rapidly evolving food delivery and quick-commerce sectors.
