Analyst Corner: Zomato target price unchanged at Rs 112

Analyst Corner: Zomato target price unchanged at Rs 112

Zomato acquired minority stakes in four companies since listing in the past few months ($50m in MagicPin for 16% stake, $75m in Shiprocket for 8%, $100m in CureFit for 6.4% and $100m in Grofers for c9%). While expansion into grocery and quick-commerce was always expected, expansion into e-com logistics and sudden multiple M&A moves has taken consensus by surprise. The company has made it clear that its long term strategy is to diversify outside FD and expand in Q-commerce and Hyperlocal e-com. Shiprocket and MagicPin provide entry into e-com for Zomato. Grofers will lead quick-commerce expansion and Zomato will invest incrementally $1bn in q-commerce. CureFit will be an entry into health-commerce and well-being (complimentary to e-com as well). These investments are leading the expansion strategy for Zomato, with an option to increase its stakes or fully buy-out if business integration progresses well.

Zomato’s strategy is in stark-contrast to Swiggy (not listed), risky but with a much bigger total addressable market (TAM): Firstly, Swiggy is building its q-commerce organically, which is a gradual process but less risky. While Swiggy is restricted to mostly q-commerce, Zomato is going all out targeting all q-commerce and the e-com market. As discussed in our thematic “India NEXT : NextGen logistics-The solid e-commerce backbone, 16 Nov ‘21”, current volumes for e-com and hyperlocal are 6m and 4m/day respectively and are likely to grow by 3x to 21m and 17m in 5 years (FY26e). While Swiggy is currently expanding q-commerce, Zomato will target both markets and has potentially a much bigger TAM to capture.

Inorganic expansion is quick, which is illustrated by Swiggy’s grocery volumes (Instamart) being still around 10-15% of Food Delivery (FD) volumes, whereas, volumes from ShipRocket, MagicPin, and Curefit could already be more than 20% of Zomato volumes.

Also, expanding to adjacent last mile delivery businesses makes sense — as discussed in our Hyperlocal note (24 Aug ’21) — we see Rs 50 as the minimum delivery cost per FD order (12-13 deliveries/day/rider). With higher volumes from adjacent areas –deliveries/day could increase to 15-20 and cost per delivery could be reduced. But, integrating multiple platforms won’t be easy and more often risks are skewed downwards.

Our FD discount tracker for December suggests discounts were largely stable (after a considerable increase in November), with a negative skew as the festive season (Diwali) came to an end in December. We increase our short-term revenue estimates, but decrease margins, leading to an unchanged Rs 112 TP.

Check the source here –Source, Financial Express.