Zomato share price jumped more than 2% in early trade on Wednesday. The stock fell more than 5% in the previous session amid reports of Open Network Digital Commerce (ONDC) offering better deals to customers compared to Zomato
Zomato shares came under pressure amid fears that the government-provided ONDC may emerge as a strong competitor to the food delivery services platforms
Domestic Brokerage firm Motilal Oswal Financial Services, however, believes that ONDC does not pose an immediate threat, at least at the current scale. However, it may be seen as a potential threat
"We do not perceive direct ordering as a major concern for the industry. However, we see ONDC as potential threat to Zomato, only if it meaningfully scales up across categories, allowing it to achieve greater efficiency compared to the walled gardens. At its current scale, we do not have enough evidence to alter our base case for Zomato," Motilal Oswal said in a report
According to analysts at Motilal Oswal, the risk posed by ONDC, will only become significant once it scales up in multiple categories including food, e-commerce, grocery, which would give it the scale to override the delivery scale of the existing players
As per the brokerage, the current 10k deliveries /day (40% in Bangalore) across categories by ONDC does not present enough scale to absorb the delivery rider cost for the platform. For comparison, Zomato currently delivers 1.8 million orders per day on standalone basis
The brokerage also noted that the delivery on ONDC apps is only free for the first order. In case of a discounted /free delivery, this cost has to be borne by the restaurant, and is not sustainable. Also, after the first free delivery, in some cases, delivery charges are higher on ONDC than Zomato and Swiggy
As per analysts, the difference in pricing between ONDC and Swiggy, Zomato is unlikely to be sufficient to override the wider selection of food options (early mover advantage) and a well-oiled delivery machine of incumbents
However, "If ONDC continues to scale up over time, this could become a significant risk, as it would enable greater delivery efficiency making the system sustainable," MOFSL said
Motilal Oswal Financial Services expects Zomato to report a strong 29% CAGR over FY23-25, and it believes that the company should breakeven in FY25. "We view the acquisition of Blinkit as an additional risk and high attrition at senior management level remains a concern," it said
Motilal Oswal values Zomato's business using DCF methodology, assuming 4% terminal growth rate and 12.5% cost of capital. The brokerage has a 'buy' rating on the stock with a target price of Rs 70, implying around 13% potential upside
"As Invesco has downgraded Swiggy, it has majorly affected Zomato also, but only for short-term. If we see in the long-term perspective, it will serve as a positive for the company. So, buy on dips. Advisable near 55 levels for a target of Rs 84. Stop loss at Rs 49," said Ravi Singhal CEO Of GCL Broking
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