Zomato investors have a reason to cheer! Emkay Global Financial Services significantly boosted its target price for Zomato shares, reflecting a bullish outlook on the company’s future, particularly fueled by the potential of its quick commerce arm, Blinkit.
Emkay’s Optimism: The brokerage firm raised the target price for Zomato to a whopping ₹230 per share, a substantial jump from the previous target of ₹170. This translates to a potential upside of over 17% from the current market price, painting a rosy picture for investors who have already witnessed Zomato’s multibagger returns exceeding 214% in the past year.
Blinkit: The Growth Engine: Emkay Global believes Zomato’s growth trajectory will be largely driven by Blinkit’s success in the burgeoning quick commerce (QC) space. QC services offer customers the convenience of getting groceries and other essentials delivered within minutes, a market segment witnessing explosive growth in India’s metro cities.
Profitability on the Horizon: Emkay Global revised its estimates for Zomato’s profitability, projecting a significant increase in profits and earnings per share (EPS) over the next two fiscal years (FY25 and FY26). This optimism stems from factors like:
- Improved Profitability in Quick Commerce: With Blinkit nearing break-even at the Adjusted EBITDA level, analysts expect exponential growth in the near to medium term. Blinkit’s profitability is projected to surpass Zomato’s core food delivery business due to its “stickier” customer base and the larger total addressable market (TAM) of retail commerce.
- Lower Employee Retention Costs (ETR): Emkay Global anticipates a reduction in ETR, a positive factor for profitability.
Food Delivery Still Relevant: While Blinkit takes center stage, Zomato’s core food delivery business isn’t fading away. Emkay Global expects healthy growth momentum in the food delivery segment, driven by:
- Steady Increase in Monthly Transacting Users (MTUs) and Ordering Frequency: A rising user base translates to more orders and revenue for Zomato.
- Benefits from New Restaurant Additions: Expanding restaurant partnerships provide customers with more choices and potentially increase order value.
- Reduced Dispersion in Commission Rates and Platform Fees: A more standardized pricing structure can lead to improved revenue streams for Zomato.
The Rise of Quick Commerce in India: The report by Emkay Global highlights the immense potential of the QC sector in India, fueled by several unique factors:
- High Population Density: Densely populated cities create a perfect environment for quick delivery services, ensuring a large customer base within a concentrated geographical area.
- Ubiquitous Kirana Stores: India boasts a vast network of local “kirana” stores, which QC players like Blinkit can leverage for faster product sourcing and potentially lower costs due to bulk purchasing power.
- Cost-Effective Labor: Relatively lower labor costs in India compared to some developed markets can contribute to a more profitable QC business model.
Blinkit’s Edge: Emkay Global positions Blinkit as a leader in the Indian QC space due to several key strengths:
- Superior Average Order Value (AOV): Blinkit consistently delivers higher average order value compared to competitors, indicating customers are purchasing more per transaction on the platform.
- Efficient Order Fulfillment: Blinkit boasts a robust system for fulfilling orders quickly and efficiently, which translates to a better customer experience.
- Strong Customer Insights: By leveraging data and customer insights, Blinkit can personalize offerings and promotions, further driving customer loyalty and repeat purchases.
Current Market Status: Despite the bullish analyst report, Zomato shares were trading slightly lower at ₹194.20 on the BSE as of 1:00 PM IST on May 10, 2024. This could be due to various market factors unrelated to the company’s specific performance.
Analyst Recommendation: Emkay Global maintained a “Buy” rating on Zomato stock, signifying their belief in the company’s long-term potential and the positive impact of Blinkit’s growth.
Looking Ahead: The analyst upgrade by Emkay Global adds fuel to Zomato’s growth narrative. While the near-term stock price might fluctuate based on broader market movements, the focus on Blinkit’s potential and the expected improvement in profitability across both segments paint a promising picture for Zomato’s future. Investors should closely monitor Zomato’s progress in both food delivery and quick commerce as the company navigates this exciting growth phase.
