Goldman Sachs, Morgan Stanley initiate coverage on Zomato; check details

• Follow

Shares of Zomato climbed over 5% after global brokerage firms Morgan Stanley and Goldman Sachs initiated their coverage on the online food delivery firm. The scrip traded nearly 6% up at Rs 132.10 at around 2.05 pm (IST), while the benchmark BSE Sensex traded 1.02% higher at 56,698.53 at around the same time. Goldman Sachs has a ‘Buy’ rating on Zomato with a target price of Rs 180 while Morgan Stanley has an equal-weight call on Zomato with a target price of Rs 140.

“We expect Zomato to be EBITDA profitable by FY’24E, driven by a larger scale, higher take rates and improving rider efficiency. Our 12-M DCF-based target price is Rs 180 (implies an upside of 44%) and we initiate with a BUY rating,” Goldman Sachs said in a statement.

Factors

On the other hand, Morgan Stanley said Zomato has strong business moats (market leadership in a fast-growing and underpenetrated market) with the potential to add new adjacencies. However, it believes that risk-reward as balanced at the current stock price.

“Zomato has built a content-led restaurant discovery platform in India and has gained market share in food delivery despite not being the first mover. On the supply side, the company has built deeper engagement with restaurants through multiple monetisation model. We expect Zomato to be one of the fastest-growing food delivery platforms globally, with a revenue CAGR of 73% over F21-24. It has already turned contribution margin positive, and we expect adjusted EBITDA margin of 14.7% of revenue (2.8% of gross order value) by FY26,” Morgan Stanley said.

Outlook

It further added that robust revenue growth through FY24 (73% CAGR for Zomato against 34-39% for peers), a consolidated market structure, and steadystate margins that are at least in line with global peers support a premium valuation for the stock.

However, Morgan Stanley sees an increase in competitive intensity and slower quarter-on-quarter growth in gross order value (GOV) as order values normalises as key risks for Zomato.