Foodservice platform, Zomato Ltd’s share price reached a record low of ₹ 40.60 last week. The shares have been on a downtrend since the company acquired Blinkit. Experts believe that this acquisition will delay the profitability of the company.
The shares are currently trading at ₹ 46.50. Three brokerages see huge upside potential in the stock, however valuation Guru Aswath Damodaran thinks otherwise.
Zomato does not have an identifiable promoter and is a professionally managed company. Therefore, the entire pre-IPO equity is locked in for 12 months from the date of allotment of shares, during the IPO. This is a mandatory requirement for such companies.
This lock-in period came to an end on July 23, therefore, there was a gush of stock supply and more than 613 crore shares or about 78% of the company’s stake were set free. This led to heavy selling, causing a free fall in the stock.
Jefferies highlighted that unlike in the past, Zomato intended to invest in multiple businesses, the company now intends to conserve cash. It does not plan to commit any resources to existing or new minority investments. The brokerage thought that it was a great case for long-term investment.
It has a buy call on the company’s shares with a target price of ₹ 100 apiece. This translates to an upside of 115.05% as compared to its current share price.
Credit Suisse had initiated coverage on the stock and suggested an outperform rating with a target price of ₹ 90 apiece. This implies an upside of 93.55%.
Kotak Institutional Securities
Domestic brokerage Kotak Institutional Securities believes that the worst is over for the stock and that the present decline is overdone. It said that the slump in the stock was triggered due to the expiry of the lock-in period for the shares held by insiders. It added that the prices have stabilized even though the shares see low-level buying.
The brokerage has upgraded the stock to buy with a target price of ₹ 79. This indicates an upside of 69.89%. Earlier, it had an add rating with a target price of ₹ 77.
“We believe the sharp correction is unwarranted and the current price is baking in fairly pessimistic growth assumptions for the food delivery business,” the brokerage said in its report.
Kotak Institutional Securities used the DCF method for the valuation of the stock and said that its food delivery business is well poised to grow at a strong pace over the next decade due to attractive market opportunities and strong execution capability.
Valuation guru Ashwath Damodaran sees Zomato at ₹35.32. This suggests more pain for the new age stock. A year ago, he had pegged Zomato’s value at ₹ 41.
Written by Simran Bafna
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