Stock Tips: The share price of online food delivery platform Zomato has jumped 5 percent today. In intra-day trade, its prices have reached a record high of Rs 147.80 on NSE, which is 95 per cent higher than the IPO price of Rs 76 per share. This rise in the share price of Zomato is not going to stop and according to the report of Swiss brokerage UBS Securities, it can climb 12 percent more. UBS Securities has given a buy rating to Zomato and has set a target price of Rs 165 per share for 12 months.
According to UBS Securities, India’s food delivery market is dominated by two companies, of which Zomato is one and its revenue can grow at a CAGR of 40 percent (Compound Annual Growth Rate). According to UBS, Zomato is the fastest growing internet company in the country. Shares of Zomato were listed in the market last week at a price of Rs 115 and since then it has gained 28.52 percent so far.
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Expensive valuation but high growth potential
According to UBS, the online food market in India is going to grow for a long time due to smaller households, less time, less desire to cook and increasing prosperity. According to UBS Securities, Zomato’s EV (Enterprise Value) to sales ratio of 17x for FY24e is not cheap but still has a lot of growth potential. The EV-to-sales of the global food delivery business is 2-9x compared to Zomato’s EV-to-sales, which is better but Zomato’s growth is estimated at 40-50 per cent as compared to 20-30 per cent of other platforms.
There are a total of 10 million active users in India and there are about 5-7 crore people ordering online. According to UBS, the boom in the online food market in India is going to last for a long time. Last year in November 2020, a UBS Evidence Lab survey showed that 80 per cent of those who had not yet ordered online are about to do so.
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Zomato benefited from three changes
According to UBS, there were three important changes in the financial year 2020-21, which benefited Zomato. Firstly, increase in the average order value, secondly the reduction in discounts and thirdly the nature of 25 per cent cost being fixed. In FY21, the average order value increased from Rs 250-270 before Corona to Rs 350-400 as there was an increase in multi-use orders. Apart from this, before Corona, Zomato used to give a discount of 8 percent of the average order value, which came down to 2-3 percent in FY 2021. The company passed on some part of the delivery charge to the customers and it increased from Rs 10-20 per order to Rs 30-40 per order. According to UBS, 25% of Zomato’s expenses are fixed in nature, leading to an increase in operating leverage.
(Article: Surbhi Jain)
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