Nomura initiates coverage on Zomato; target suggests 19% downside for stock

Foreign brokerage Nomura has initiated coverage on Zomato with a 'Reduce' rating and a target of Rs 50. The target suggests a potential 18.56 per cent downside from Friday's closing price of Rs 61.40.

Nomura India said a double-digit contribution margin in food delivery (FD) is a tough task and that it expects Zomato’s food delivery business to become profitable at the adjusted Ebitda level by Q1FY24, excluding Blinkit. This, it said, would be led by disciplined execution in a duopoly market.

"Zomato’s target of reaching a double-digit contribution margin in the long term hinges on a rise in commissions from restaurants (we expect it to rise from 15 per cent in FY22 to nearly 17.5 per cent in FY31F) and charging higher customer delivery fees (we believe this would be difficult, and expect it to remain steady at 6 per cent)," it said.


Overall, the brokerage expects contribution to peak at a 7.5 per cent margin. It sees a 4.5 per cent adjusted Ebitda margin on gross order volumes (GOV) by FY31 against global FD companies’ long-term targets of 4-8 per cent in markets where online FD is more mature and customers’ willingness to pay for convenience is higher.

It further expects FD revenue growth to moderate by FY27. It sees FY22-27 GOV CAGR of 22 per cent against FY27-FY31 CAGR of 12 per cent, with a flattened monthly ordering frequency of 3.6 times per monthly transacting users (MTU).

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