Kotak joins Jefferies & Credit Suisse to turn bullish on Zomato; sees 75% upside

New Delhi: After strong targets for by global brokerages, domestic brokerage Kotak Institutional Equities (KIE) believes that the worst is over for the stock and the present decline is overdone.

The domestic broker said the slump in the stock prices was triggered by the expiry of the lock-in period for shares held by insiders and is now overdone. “Prices have stabilised since then, even though it sees low-level buying,” it added.

Kotak Institutional Equities has upgraded the stock to Buy with a target price of Rs 79, hinting at a 75 per cent upside from its previous close. Earlier, it had an ‘Add’ rating on the stock with a target of Rs 77.

“We believe the sharp correction is unwarranted and the current price is baking in fairly pessimistic growth assumptions for the food delivery business,” said Kotak Institutional Equities in its report.

Zomato does not have an identifiable promoter and is a professionally managed company. In such cases, entire pre-IPO equity is locked in for 12 months from the date of allotment of shares, during the IPO.

As the mandatory lock-in for Zomato expired on July 23, there was a gush of stock supply as more than 613 crore shares or about 78 per cent stake of the company was set free, which induced heavy selling, sparking another freefall in the stock.

KIE believes that it is a bearish scenario and presents a buying opportunity for the investors as the current price cumulative cash burn of $1.6 billion in food delivery and quick commerce is priced in before they turn profitable or break even.

The current prices also factor in sharply lower contributions margins of core food delivery business and NIL value accretion from existing investments, including Blinkit.

Zomato will need to make upfront investments in the quick commerce business, but the company’s cash balance of $1.6 billion is sufficient to fund the losses, believes analysts at KIE who don’t anticipate any near-term liquidity constraints.

“Zomato’s food delivery business is well-poised to grow at a strong pace over the next decade led by attractive market opportunity and strong execution capability,” said KIE, which valued the food delivery business using a DCF-based method.

Shares of Zomato have plunged about 75 per cent from their peak of Rs 169.10. However, the stock plunged about 40 per cent from its issue price of Rs 76.

Global brokerage firm, Jefferies, has a buy tag on the counter target of Rs 100, hinting at an upside of about 120 per cent, whereas Credit Suisse sees the stock at Rs 90 in the coming days.

On the contrary, valuation Guru Aswath Damodaran sees Zomato at Rs 35.32, suggesting more pain for the new-age stock. Just a year earlier, he had pegged Zomato’s value at Rs 41.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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