Should You Invest in Zomato? Morgan Stanley Sets New Target Price amidst Strong Stock Performance

Global brokerage firm Morgan Stanley has reaffirmed its “Overweight” rating for Zomato and set a target price ofRs. 278 per share. This suggests a nearly 8 percent increase from the current closing price. This positive outlook follows Zomato’s impressive 46 % stock surge since May, driven by strong performance in the June quarter. Despite facing intense competition in the quick commerce (QC) sector, Morgan Stanley remains optimistic about Zomato’s long-term prospects.

Competitive Landscape

Morgan Stanley acknowledges the growing competition in the quick commerce market but views it as a sign of the sector's increasing importance. While this heightened competition might delay Zomato's profitability, the brokerage stresses that maintaining market leadership is crucial for Zomato’s future success. Investors are advised to view any short-term price drops as opportunities to buy shares for long-term gains.

Zomato’s Stock Performance

Zomato's stock has performed exceptionally well over the past year, rising 183 percent and gaining over 111 percent in 2024 so far. After a significant drop following its IPO, Zomato’s stock has shown positive returns in seven of the eight months of 2024. The stock has risen 14 percent in August alone, following gains of 14.4 percent in July and 12 percent in June. Currently, it is trading just over 7 percent below its 52-week high of Rs. 278.45, achieved earlier this month.

Financial Highlights

Zomato recently reported a dramatic net profit growth of 126.5 times for Q1FY25, reaching Rs. 253 crore, up from Rs.2 crore the previous year. This increase was fueled by higher gross order value across its food delivery, quick commerce, and going-out sectors. This marks the fifth consecutive quarter of positive earnings for the company. Other income also rose to Rs.236 crore from Rs.181 crore a year ago, supported by Zomato's robust cash reserves of over Rs. 12,000 crore.

Revenue jumped 74 % year-on-year in the June quarter, reaching Rs.4,206 crore, up from Rs. 2,416 crore the previous year. Zomato’s Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) turned positive at Rs. 177 crore, up from a loss of Rs. 48 crore in the same period last year. The EBITDA margin was reported at 4.2 percent.

Market Share and Strategy

Zomato’s management highlighted gains in market share in Southern Indian cities, previously dominated by Swiggy. The company’s Gross Order Value (GOV) increased by 53 percent to Rs.15,455 crore. Despite an adjusted EBITDA loss of Rs.3 crore for Blinkit, Zomato’s quick-commerce arm, it exceeded its store addition targets by opening 113 new stores.

Multiple brokerages estimate that Zomato now holds around 55 percent of India’s food delivery market share, with Swiggy losing ground. Zomato’s focus on non-metro cities, once seen as unprofitable, is now proving successful.

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Other Brokerage Insights

Nomura also raised its target price for Zomato to Rs.280 from Rs.225, maintaining a ‘buy’ recommendation. The firm notes Zomato’s significant growth potential and improving profitability in its food delivery and quick commerce businesses. Nomura projects a 100-110 %  annual growth in Q-commerce for FY25-FY26 and expects Zomato to approach adjusted EBITDA breakeven.