Invest in Credit Risk Mutual Fund or not?

With Zomato trading at over Rs 1 lakh crore market capitalization investors are in a dilemma whether to invest in a loss-making high growth company or not. Ace investor Rakesh Jhunjhunwala sees it as ‘tulip mania’. He is of the opinion that it doesn’t matter how much valuations the newly listed firm has earned. “Show me the cash-flow! What is more important is how long the company lasts. The world is giving too much valuations to the digital change. Such valuations are not sustainable, in my view,” he had said at an event last week.

Shares of the company have ended at Rs 142.25 in today’s session a 87.17% jump from the issue price of Rs 76. The online food delivery firm made a robust debut on the bourses on July 23, as its shares surged nearly 66% against the issue price.

Why are brokerages bullish?

Unlike Jhunjhunwala, global and local brokerages are bullish on Zomato. In a recently released report global brokerage UBS has set a price target of Rs 165 on the company. As one of the two leading players in the rapidly growing food delivery market in India, the overseas firm believes that Zomato to deliver over 40% revenue annually making it one of the fastest-growing internet companies in the region.

“Not only did online food delivery get a boost globally in 2020, secular factors such as smaller family sizes, lesser time and willingness to cook and increasing affluence also provide a favourable long-term growth tailwind for the online food market in India,” UBS said in a report.

Three reasons

The global brokerage firm further highlighted that three changes in FY21 helped Zomato achieve positive contribution profit. Firstly, there was an increase in average order value (AOV) from Rs 250-270 pre-Covid to Rs 350-400 as multi-use orders increased. Secondly, Reduction in discounts from around 8% of AOV to 2-3% and lastly, the partial shift of delivery charges to consumers (Rs 10-20 to Rs 30-40 per order).

Similarly, local brokerage firm JM Financial is also upbeat on Zomato and has initiated coverage on the counter with a price target of Rs 170 implying an upside of 28%.

It believes that Zomato is well-poised to leverage the large growth opportunity in the food services ecosystem due to its market-leading positioning, strong balance sheet and diversified offerings across the value chain. The company also remains well-placed to explore growth opportunities in adjacent hyperlocal delivery verticals. To better factor in these opportunities, we believe Zomato should be valued with a longer-term bias that would also dilute the impact of distorted financials in the near term due to one-offs.

The brokerage house values Zomato as of Mar’30 at 11x EV/Adj. Sales, the current CY22E EV (enterprise value)/Sales trading multiple of its most comparable global peer Doordash.

Likewise, even global brokerage firm Jefferies is bullish on the counter and believes that focus on growth theme and profitability will follow. It is of the opinion that Zomato can break even by FY26.

Jefferies values the delivery franchise at 2.5x FY26E GMV (gross merchandise value), dine-out/ Zomato Pro at 10x FY26 revenues and Hyperpure at 1x FY26E revenue. After discounting it back the global firm arrived at a twelve-month price target of Rs170. On its twelve-month price target, the stock would trade at 20x FY23 EV/gross sales and imply 5.7x GMV in the food delivery business.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firms. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing)