Global brokerage Morgan Stanley has reiterated its Overweight rating for Zomato and set a price target of ₹278 per share, up nearly 8 percent from the previous closing price. This optimistic forecast follows Zomato’s impressive 46 percent rise since May, supported by strong results in the June quarter. Despite competitive pressures in the quick commerce (QC) business, Morgan Stanley remains confident in Zomato’s long-term potential.

According to Morgan Stanley, the increasing intensity of competition in the quick commerce sector underscores its growing importance in the market. However, the brokerage also warned that this increased competition could delay Zomato’s path to profitability. Nevertheless, Morgan Stanley stressed that maintaining market leadership is crucial for Zomato’s long-term success, even if it means a short-term delay in profitability.

The company advised investors to view any short-term price declines due to competitive pressure as an opportunity to acquire shares for the long term.

Zomato’s outstanding stock performance

Zomato has delivered exceptional returns over the past year, with the stock up 183 percent year-to-date and over 111 percent. After a sharp correction post-IPO, the company has delivered positive returns in seven of the eight months of 2024 so far. The stock has already gained 14 percent in August, continuing its upward momentum after a 14.4 percent rise in July and 12 percent in June.

Zomato recorded a correction of 7.25 percent in May, a gain of almost 13 percent in January, 18.5 percent in February, 10 percent in March and 6 percent in April. The stock is currently trading just over 7 percent below its 52-week high of ₹278.45, which was reached earlier this month on August 2. In addition, it has risen from its 52-week low of over 194 percent ₹88.16, hit on August 21, 2023.

Strong performance in the first quarter of fiscal year 2025

Zomato recently reported a remarkable net profit growth of 126.5 times for Q1FY25, reaching ₹253 crore, an increase of ₹2 Crore a year ago. This growth was driven by increased gross order value in food delivery, quick commerce and dining, marking the fifth consecutive quarter of positive earnings for the company. Higher other income attributable to ₹236 crore from ₹181 crore in the previous year, also contributed to this profitability, supported by Zomato’s substantial cash reserves of over ₹12,000 crores.

The company’s revenue increased by 74 percent in the June quarter compared to the same period last year, reaching ₹4,206 crore compared to ₹2,416 crore last year. Zomato’s earnings before interest, taxes, depreciation and amortization (EBITDA) was also positive and stood at ₹177 crore, against an EBITDA loss of ₹48 crore in the same period last year. The EBITDA margin was reported at 4.2 percent.

Market shares and growth potential

Zomato management highlighted the market share gains in South Indian cities, historically dominated by Swiggy, during the recent earnings call. The company’s gross order value (GOV) also increased by 53 percent to ₹15,455 Crore. Zomato defines GOV as the total value of orders from its customer-facing businesses, including food delivery, quick commerce and dining out. Blinkit, Zomato’s quick commerce arm, reported an adjusted EBITDA loss of ₹3 Crore, but exceeded its forecast for new store openings by opening 113 stores.

Several brokerage firms estimate that Zomato’s market share in the Indian food delivery sector has increased to around 55 percent, while Swiggy has lost ground. Zomato’s strategy of focusing on non-metro cities was initially considered unprofitable, but has now proven to be a long-term success.

Nomura also raised its price target for Zomato to ₹280 of ₹225, maintaining a buy rating. The firm highlighted Zomato’s significant growth potential and increasing profitability in both its food delivery and quick commerce businesses. Nomura expects Q-Commerce to grow at 100-110 percent annually in FY2025-2026, with Zomato breaking even at -0.1 percent on adjusted EBITDA and forecasting a margin of +1.1 percent for FY2025.

Zomato’s high growth trajectory and increasing profitability continue to make the company an attractive investment opportunity in the Indian market.

Disclaimer: The views and recommendations expressed above are those of individual analysts or brokerage firms and not of Mint. We advise investors to seek advice from certified professionals before making any investment decision.