Kotak sees over 20% upside in this newly listed firm; should you buy?

Kotak Institutional Equities initiated coverage recently listed firm Zomato with a target price of Rs 175, indicating an upside of over 20% from the current market price. The brokerage believes that the company’s leadership position in the under-penetrated food-delivery space will drive a healthy revenue CAGR of 36% over FY2021-30. Shares of the online food delivery firm traded 1.57% higher at Rs 142.10 at around 12.02 pm (IST). On the other hand, the benchmark BSE Sensex was almost flat at 58,279 at around the same time.

“Turnaround in unit economics will lead to profitability by FY2025, leaving Zomato with the bulk of its current around $2 bn cash balance intact, which can drive the company’s entry into fresh adjacencies enabling further value creation,” Kotak said in a report.

The brokerage firm further added that Zomato’s future growth and potential entry into other businesses trump the revenue growth of peers.

“Rise in income levels, evolving tastes and preferences will drive greater demand for food delivery in the future. This will manifest in strong growth in users on food delivery platforms as well as in ordering frequencies. We thus model a healthy 55% revenue CAGR for Zomato over FY2021-24 and 36% revenue CAGR over FY2021-30. Zomato will also continue to explore adjacent businesses which can drive these revenue growth rates further up,” Kotak Institutional Equities said.

Of late, shares of Zomato made a stellar debut on the stock exchanges in July with the shares listing at Rs 115 on BSE – a premium of more than 51% when compared to the issue price of Rs 76.

On the other hand, Kotak highlighted that regulatory scrutiny on take rates and delivery charges earned by food delivery companies is a key risk. “Higher driver wages if mandated by labour law changes could also be a negative. Higher competitive intensity and value destructive acquisitions are also risks,” Kotak Institutional Equities said.