Zomato Set for Growth: Motilal Oswal Recommends Buy with ₹320 Target

Overview: Motilal Oswal is optimistic about Zomato, giving it a “Buy” rating and setting a target price of ₹320 in their report dated October 7, 2024.

Key Insights:

• Zomato is currently leading the market in food delivery and quick commerce, despite competition from Swiggy, which has shown signs of growth.
• While Zomato has a stronghold in food delivery, Swiggy’s innovative strategies, such as its integrated app and fast delivery services, could help it catch up.
• In food delivery, Zomato has increased its market share from 54% in FY22 to 58% in Q1 FY25, while Swiggy has also expanded its user base and restaurant partners significantly.
• Zomato outperforms Swiggy in the average number of monthly users (20.3 million compared to Swiggy’s 14 million), while Swiggy boasts higher gross order value (GOV) per user by about 6%.
• In terms of profitability, Zomato’s food delivery business shows consistent growth with an EBITDA margin of 3.4%, compared to Swiggy’s 0.8%, indicating Zomato’s better monetization strategy.

Quick Commerce Competition:

• Zomato acquired Blinkit to strengthen its grocery delivery service, while Swiggy launched Instamart. Blinkit currently leads in market share and profitability, but the competition remains fierce and still developing.
• Blinkit operates more dark stores and has a higher gross order value and take rate than Instamart, suggesting a stronger foothold in quick commerce.

Innovation Edge:

• Swiggy’s integrated app strategy allows it to innovate faster than Zomato. Its new 10-minute food delivery service is a notable example, offering a quick turnaround for popular brands like KFC and McDonald’s.
• Zomato attempted a similar service but struggled to scale it. Swiggy’s experience in quick commerce may allow it to stay ahead in this rapidly evolving market.

Valuation and Outlook:

• Zomato’s stable food delivery business and Blinkit’s potential present a significant growth opportunity. Analysts expect Zomato to achieve a revenue CAGR of 55% from FY24 to FY27, with improving profit margins.
• Based on a discounted cash flow (DCF) analysis with a cost of capital of 12.5%, Motilal Oswal’s valuation of ₹320 implies a potential upside of 21% from the current share price, leading them to reiterate their “Buy” recommendation.

Conclusion: Zomato stands out in the competitive landscape of food delivery and quick commerce, backed by strong market performance and growth potential, making it an attractive buy according to Motilal Oswal.

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