Is it right time to order Zomato shares post 90% gains from issue price? Here's what UBS has to say

Global brokerage UBS initiated the coverage on recently listed Zomato with a target price of Rs 165. 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.

Shares of the company have already jumped around 91% to Rs 145 in the morning trade on Tuesday 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.

“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.

With the rally in the shares, the company’s market valuation is now hovering above Rs 1.13 lakh crore mark on the BSE.

UBS 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).

“While some of these could reverse post-Covid, we believe the reduction in discounts and passing of delivery charges are signs of a maturing market,” UBS said adding in e-commerce, emerging market platforms such as Sea, MELI and Allegro trade at a premium to Chinese and DM peers due to superior growth rates.

“Zomato’s enterprise value to sales vs sales growth is at 37 times vs 7 times-45 times for peers,” UBS said in a report.