Kotak Institutional Equities cuts Zomato's target price. Here's why

Kotak Institutional Equities has cut Zomato's target price to Rs 85 from Rs 100 earlier, as its conversations with industry participants indicated that food delivery gross merchandise value (GMV) growth may remain subdued in the near-term, owing to weak demand. The target still suggests a 46 per cent potential upside over Monday's closing price of Rs 58.20 apiece.

Kotak said it expect Zomato’s food delivery GMV growth to decelerate to 21 per cent YoY in H2FY23 from 35 per cent YoY in H1FY23.

Although average order values (AOVs) are likely to hold up due to inflation and relatively higher delivery charges, slower growth in orders will lead to slower GMV growth, it said,

"This, in turn, is owing to weak consumer demand in what otherwise is a seasonally strong quarter for outdoor food consumption. We reckon the weakness is pan-India, with a slowdown in demand in metro and non-metro geographies. The fact that restaurant chains are also witnessing a slowdown, indicates the slowdown is across channels and delivery is not necessarily losing share to in-store dining," the brokerage said.

Kotak noted that Zomato has begun offering customers free deliveries for limited time after payment of an additional fee with an existing order. Anecdotally, the additional fee, number of free deliveries offered and duration over which customers can avail free deliveries seem to be different for different consumers, indicating some select targeting by Zomato, it said.

"While selective, this offering can result in flat contribution margins for Zomato over the next 1-2 quarters," Kotak said.

The domestic brokerage is baking in slower food delivery GMV growth forecasts of 26-22 per cent over FY23-25 against 32-30 per cent earlier.

"Lower growth forecasts drive a revised DCF-based FV of Rs 85 (Rs100 earlier). Zomato is our preferred pick among internet stocks, given the duopolistic market structure and large market potential," it said.

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