Mutibagger Zomato shares up 117% year-to-date, Morgan Stanley sees more upside potential

Quick-commerce is rapidly expanding in India and Zomato Ltd's strong performance despite the ongoing market correction indicates that the segment is getting even hotter with each passing day. Zomato's stock has rallied around 117 per cent in 2024 so far compared to a little over 7 per cent rise in benchmark BSE Sensex in the same period.

Multinational investment firm Morgan Stanley expects the online food- and quick-commerce aggregator to maintain its near 40 per cent market share in spite of a rise in competition. It maintains an 'overweight' stance on Zomato with a revised target price of Rs 355 from an earlier value of Rs 288 per share.

"Rising share of quick commerce in India's retail market, strong execution in food delivery/quick commerce, deep balance sheet and large profit pool by 2030 keep us 'Overweight'. We build in adjusted EBITDA breakeven for the next two to four quarters, implying substantial investments in aggressive expansion. We assume margins of 2.2 per cent by F2027 and 5.1 per cent by F2031, implying an annual profit pool of close to $1 billion for this business. We believe the market has assigned a value of Rs 120 per share to Blinkit (vs our PT implied value of Rs 212/share). We see downside support at Rs 160 (-35 per cent from CMP) with potential upside of 37 per cent to our price target," Morgan Stanley says.

What's changed?

"Our F25-26 adjusted EBITDA estimates for food and related businesses are unchanged, while we moderate our QC profit forecasts due to aggressive competition. We shift our valuation methodology to SOTP as food and QC businesses are in different stages. We now value QC by assigning an exit-adj EBITDA multiple on F31e (vs. F27e earlier) and then discount back to Dec-25. We also build in potential dilution of up to 3 per cent due to the QIP in the coming months. Overall, our scenario values rise by 14-29 per cent. We think the stock has the potential to double in five years in our base case and in less than three years in our bull case," the brokerage adds.

Any risks?

Morgan Stanley says competition growing more aggressively in the quick-commerce business remains one of the key risks to the above conjecture. This assumes significance as after Swiggy Ltd's recent stock market debut, its post-listing performance is closely watched, especially the new entrant's potential to close the valuation gap with Zomato and enhance operational efficiency.

Deterioration in unit economics of existing older stores, regulatory risks around gig workers' social security and low top-line growth due to macro slowdown are some other risks involved.

Meanwhile, Zomato shares jumped 4.27 per cent to settle at Rs 269.60 on Thursday. Domestic benchmarks remained closed today on account of "Guru Nanak Jayanti." Indices will reopen on Monday (November 18).