Zomato gained 183% in a year, 111% in 2024 so far; should you bet on the stock? Here’s what Morgan Stanley projects

Global brokerage firm Morgan Stanley has reaffirmed its "Overweight" rating on Zomato, setting a target price of ₹278 per share, signaling a nearly 8 percent upside from the last closing price. This optimistic outlook comes after Zomato's impressive 46 percent surge since May, bolstered by strong June quarter results. Despite the competitive pressures in the quick commerce (QC) business, Morgan Stanley remains confident in Zomato's long-term potential.

According to Morgan Stanley, the increasing competitive intensity in the quick commerce sector underscores its growing importance in the market. However, the brokerage also cautioned that this heightened competition might delay Zomato's path to profitability. Despite this, Morgan Stanley emphasised that maintaining market leadership is crucial for Zomato's long-term success, even if it means deferring profitability in the near term.

The firm advised investors to consider any short-term price dips due to competitive pressures as opportunities to accumulate shares for the long haul.

Zomato's Stellar Stock Performance

Zomato has delivered exceptional returns over the past year, with its stock rallying 183 percent and over 111 percent in 2024 year-to-date. Following a strong correction after its IPO, the company has posted positive returns in seven of the eight months of 2024 so far. The stock has already gained 14 percent in August, continuing its upward momentum after a 14.4 percent rise in July and 12 percent in June.

Zomato saw a 7.25 percent correction in May, gains of almost 13 percent in January, 18.5 percent in February, 10 percent in March, and 6 percent in April. The stock is currently trading just over 7 percent below its 52-week high of ₹278.45, reached earlier this month on August 2. Additionally, it has surged over 194 percent from its 52-week low of ₹88.16, hit on August 21, 2023.

Strong Q1FY25 Performance

Zomato recently reported a remarkable net profit growth of 126.5 times for Q1FY25, reaching ₹253 crore, up from ₹2 crore a year ago. This growth was driven by increased gross order value across its food delivery, quick commerce, and going-out verticals, marking the fifth consecutive quarter of positive earnings for the company. Higher other income, which rose to ₹236 crore from ₹181 crore a year earlier, also contributed to this profitability, supported by Zomato's substantial cash reserves of over ₹12,000 crore.

The company's revenue surged 74 percent year-on-year in the June quarter, reaching ₹4,206 crore compared to ₹2,416 crore last year. Zomato's Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) also turned positive, standing at ₹177 crore, up from an EBITDA loss of ₹48 crore in the same period last year. The EBITDA margin was reported at 4.2 percent.

Market Share and Growth Potential

Zomato's management highlighted its gain in market share in Southern Indian cities, historically dominated by Swiggy, during the recent earnings call. The company's Gross Order Value (GOV) also rose by 53 percent to ₹15,455 crore. Zomato defines GOV as the total value of orders from its consumer-facing businesses, including food delivery, quick commerce, and going out. Blinkit, Zomato's quick-commerce arm, reported an adjusted EBITDA loss of ₹3 crore, but exceeded its store addition guidance by adding 113 new stores.

Multiple brokerage firms estimate that Zomato's market share in India's food delivery sector has risen to around 55 percent, while Swiggy has lost ground. Zomato's strategy of focusing on non-metro cities, initially seen as unprofitable, has now proven to be a long-term success.

Nomura also raised its target price for Zomato earlier this month to ₹280 from ₹225, maintaining a ‘buy’ recommendation. The firm highlighted Zomato's significant growth potential and improving profitability in both its food delivery and quick commerce businesses. Nomura expects Q-commerce to grow 100-110 percent annually in FY25-FY26, with Zomato nearing adjusted EBITDA breakeven at -0.1 percent and projecting a +1.1 percent margin for FY25.

Zomato's high growth trajectory and improving profitability continue to make it a compelling investment opportunity in the Indian market.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.