Zomato shares jump 8% after ONDC's incentive revision; what's next for the stock?

Shares of Zomato surged sharply on Friday as the stock surged 8 per cent during the early trading session on the back of positive news flow over the revision of incentives and discounts at ONDC. The stock is less than 4 per cent shy of its issue price at Rs 76.

The government-backed ONDC is making revisions to its incentive structure. Under the new regime, the maximum pricing incentive will be capped at Rs 100 per order, which was Rs 120 per order earlier. Also, the total incentive will not exceed 50 per cent of the total order value, including the shipping charges.

Open Network for Digital Commerce (ONDC) has revised its incentive scheme for network participants to reduce the dependency on discounts for adoption, largely putting to rest questions around the network's potential to end the duopoly of Zomato and Swiggy.

Shares of Zomato surged about 8 per cent to Rs 73.20 on Friday, following the news development. However, the stock was seen at Rs 72.25 at 9.40 am with a market capitalization of little more than Rs 62,000 crore. The scrip had settled at Rs 67.92 on Thursday.

For the eligibility to avail the incentives, the minimum order value should be around Rs 200 for the food and beverage segment, while Rs 300 for all other categories including shipping charges. Furthermore, a buyer is eligible for an incentive for a maximum of five transactions per month.

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Shares of Zomato have gained more than 80 per cent from its 52-week lows at Rs 40.55 on July 27, 2022. It is up 20 per cent in the year 2023 so far, while its performance in the last one year is flat. The stock has gained more than 15 per cent in the last one year.

Zomato reported trimming of losses - both on a year-on-year (YoY) and sequential basis - in the March quarter. The company’s consolidated net loss narrowed to Rs 188 crore from Rs 360 crore a year ago and Rs 345 crore a quarter ago. Consolidated revenue for Zomato increased a whopping 70 per cent YoY to Rs 2,056 crore, but missed estimates.

Christopher Wood, the stock guru and the Global Head of Equity Strategy of Jefferies has added Zomato for his India long-only portfolio, with a 4 per cent weightage. Zomato has also been added to the global long-only equity portfolio in the May edition of Wood's 'Greed & Fear’ index.

"The core business milestone was achieved mainly on the back of solid expansion in the food delivery contribution margin to 5.8 per cent vs 5.1 per cent in Q3. This was because profitability levers such as improvement in restaurant commissions and income, and lower discounts/variable cost offset the adverse impact of Gold launch,” JM Financial said with a 'buy' tag and target of Rs 105.

Management guides for positive adjusted EBITDA and PAT on a consolidated basis within the next four quarters, and plans to achieve this via profit growth in the FD business; loss reduction in Blinkit. The superior Q4 performance bolsters our belief in Zomato’s ability to execute & deliver profitable growth, said Emkay Global with a 'buy' rating and a target price of Rs 90.

"We note a sustained improvement in profitability of the food delivery business and meaningful reduction in losses in the hyperpure and quick commerce businesses. We believe that both the hyperpure business and the Blinkit business can turn profitable," said ICICI Securities with a target price of Rs 83 on the stock.


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