Zomato Ltd witnessed a slight decline in its share price after brokerage firm CLSA downgraded the stock from ‘buy’ to ‘outperform’ due to valuation concerns, erasing the morning gains.
During intraday trading, the stock surged over 1 percent, reaching a new 52-week high of Rs 107 per share. However, by 12:30 pm, it was trading at Rs 105 on the BSE, marking a marginal decrease of 0.33 percent from its previous close. Notably, the stock has soared by over 106 percent since April, while the Sensex increased by 11.6 percent over the same period.
CLSA expressed reservations about the stock’s short-term movement, particularly after it doubled in value over the past six months. The brokerage firm also cited concerns about Zomato’s growth prospects due to sluggish demand in the second quarter of FY24, as indicated by CLSA’s channel checks.
Furthermore, CLSA pointed out that the positive anticipation surrounding the 2023 Cricket World Cup in October-November seems to be already factored into the current stock price. Several analysts had previously suggested that Zomato might benefit from the ICC Cricket World Cup 2023, with Jefferies, in particular, predicting increased restaurant consumption that would favor Zomato.
Nonetheless, CLSA remains optimistic about Zomato’s long-term growth potential, highlighting factors such as rising disposable incomes, increased order frequency, and favorable competitive conditions as key positives. The brokerage firm raised its target price from Rs 105 to Rs 120, factoring in profitability assumptions and a rollover to September 2025.
CLSA also shared expectations that consumer company revenue growth may slow in the second quarter of FY24 due to weak volumes and pricing factors. Staples companies could witness improved gross margins, albeit limited operating margin growth due to increased advertising spending. Meanwhile, discretionary companies might experience soft demand in 2Q but could benefit from an extended festive season and the Cricket World Cup in the latter half of the fiscal year. Positive feedback from the festive season could serve as a significant catalyst to watch, according to CLSA.