The brokerage has reiterated its buy rating on the stock which has gained more than 120% since its February lows, and is now poised for another 51% upside.
ICICI Securities revised its target upwards from the previous target of Rs 120 relying on the company’s potential to report sharp improvement in profitability in all three businesses of Zomato viz. food delivery, quick commerce and hypercure.
The valuations for the stock are now pretty sensible, leaving enough room for meaningful re-rating of the stock, ICICI said in a note.
1) The food aggregator space is still nascent as 89% of Zoamto’s revenues come from the top 18% of the user base, which shows there is enough room for revenue growth in the medium term without expanding its geographical footprint further.
2) Gold users order from Zomato nine times a month and the next tranche of users, whom ICICI classified as regular users (non-gold), order from Zomato 2.7 times a month. “Therefore, the ordering frequency increases the potential for regular non-gold users graduating to gold membership is very meaningful in our view,” ICICI Securities said.
3) ICICI Securities sees 4% adjusted EBITDA as a percentage of gross order value (GOV) to be achieved as early as Q3FY24E led by strong order volumes and AOVs (average order value) aided by the ongoing ICC World Cup 2023 and the festive season. Meanwhile, a 4.6% adjusted EBITDA is estimated to be achieved in food delivery by Q1FY25, the brokerage said. “This implies 220bps profitability improvement over the next 4 quarters to be mostly driven by a combination of increase in ad revenue (60bps), increase in gold revenue (45bps) and contribution from platform fees (45bps).
4) The quick commerce business could turn contribution positive on the full quarter basis by Q2FY24E and profitable at the adjusted EBITDA level by Q1FY25. The quick commerce business could improve adjusted EBITDA as % of GOV by 620bps over the next four quarters.
5) ICICI estimates adjusted EBITDA margin to improve from -5.7% in Q1FY24 to -3.2% in Q1FY25 for the hyperpure business.
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