Should You Buy Zomato Share Now?

Analysts believe Zomato’s valuation to be very high because of the valuation at which it has been marked down by its investors post the Uber Eats merger. The company, however, believes that Uber Eats is an opportunity and not a competitor, which may help it achieve better valuations on exit. It needs to show lower than expected losses and rapid top-line growth if it has plans of taking on Swiggy, which is its main competition in the online food ordering business.

The food delivery space has been witnessing hyper-competition lately, with players firing ad campaigns and offering discounts to gain market share. However, Zomato has managed to stand out in the sector due to its strong brand perception, with a net promoter score of 53.6 (Bain estimates).

With strong growth driven by a global customer base and fresh bets in adjacent businesses, Zomato is set to witness significant growth over the next few years, despite entering a slow growth phase in metros.

Zomato posted a mixed set of earnings where the top line is encouraging but profitability is a major concern. The investments are related to their current business, therefore, the market is reacting positively to that and that may help the company to grow further, however, cash flow will be the key in the future.

The outlook is bullish as penetration of the food delivery business in India is still low but only aggressive investors are advised to hold this stock when it is not profitable yet. Though it is fast-moving on road to profitability. Edelweiss expects it could start turning green in fiscal 2023. But the profits will inch up slowly.

However, valuations are still not reasonable. Its Price to Sales Ratio is 51, which is ridiculous. Considering the fact that highly profitable internet enterprises like Indiamart Intermesh and InfoEdge is available at 56.60 and 28 rs.

Is there any logic that Zomato should be selling at the almost  same valuation as that of Naukri Dotcom when the other is a highly profitable company whereas Zomato is neither a monopoly and nor profitable?

Other striking thing is CMP/BV of InfoEdge is almost half to that of Zomato when it is yet to make a profit.

Premiumisation Will Improve Margins

With more premium restaurants, i.e. restaurants where a meal for two or more people might cost ₹1500 and above, now opening up to online delivery, a larger number of affluent consumers are embracing online ordering. Overall spending on such premium restaurants have grown by over 25% over pre-COVID levels. It will help improve the value of transactions.

In the latest blog by Zomato Co-Founder and CEO Deepinder Goyal, titled ‘Post-Coupon Exuberance,’ said that growth in its foodservice orders has not only recovered from the stagnant months following discounts, it has also picked up the pace. The company expects it to continue to strengthen over the next couple of years.

The valuation premium of Zomato will depend on growth and the market will not tolerate any slip on this front.  As Goldman Sachs reported that “Zomato mentioned it is now profitable at the EBITDA level and now it’s in profit of $4 mn instead of loss 15 months ago.

Though Zomato is on the path of profitability with humongous growth opportunities, current valuations are not justified.

The stock is very good. The business is extremely good. However, the price at which it’s selling in the market is not good.  Can you buy a silver coin at the rate of gold? If you answer this question, you’ll get the answer to whether you should buy Zomato or not.

 

Vikash Kumar

An investor with more than 15 years of experience in the market. I m deeply interested in positional and momentum-based trading strategies and love learning strategies and backtesting.

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