Zomato Shares Drop 6% Post Q4 Results: Is This a Buying Opportunity?

Zomato Shares Drop 6% Post Q4 Results: Is This a Buying Opportunity?

On May 14, 2024, Zomato’s share price fell by 6% after the company announced its Q4 results for the fiscal year 2024. Despite reporting a consolidated net profit of ₹175 crore, a significant turnaround from a loss of ₹188 crore in the same quarter the previous year, the stock declined as much as 5.98% to ₹182.10 per share on the Bombay Stock Exchange (BSE). This drop raises a critical question for investors: Is this an opportunity to buy Zomato shares?

 

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Q4 Performance Highlights

Zomato’s financial performance in Q4FY24 showed substantial improvements. The company reported a net profit of ₹175 crore, compared to a loss of ₹188 crore in the same quarter a year ago. This profit also marked a 27% increase from the ₹138 crore net profit recorded in the December quarter. Zomato’s revenue from operations increased by 73% year-over-year (YoY) to ₹3,562 crore from ₹2,056 crore. The Gross Order Value (GOV) for the March quarter grew by 51% YoY to ₹13,536 crore.

At the operating level, Zomato posted an Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) of ₹86 crore. This was a significant improvement from an operating loss of ₹226 crore during the same period last year. Furthermore, Zomato’s quick commerce arm, Blinkit, achieved operational EBITDA break-even in March 2024, a key milestone for the company.

 

 

 

Analyst Opinions

Despite the initial negative market reaction, analysts remain largely bullish on Zomato’s future prospects, citing several factors:

1. Emkay Global Financial Services: Emkay noted that Zomato’s revenue was ahead of their estimates, although margins were slightly lower due to higher ESOP (Employee Stock Ownership Plan) costs. They have maintained a ‘Buy’ rating with a target price of ₹230 per share. Their valuation is based on a Sum of the Parts (SOTP) method, valuing the food delivery business at ₹121 per share and Blinkit at ₹93 per share.

2. Nuvama Institutional Equities: Nuvama highlighted Blinkit’s rapid expansion plans, aiming to increase the number of dark stores from 525 in Q4FY24 to 1000 by the end of FY25. This aggressive growth strategy is expected to impact short-term profitability but solidify Blinkit’s leadership in the quick commerce sector. Nuvama upgraded its target price for Zomato to ₹245 per share, reflecting the increased value due to Blinkit’s growth.

3. Elara Capital: Elara Capital emphasized Zomato’s strong position in the food delivery market and superior execution for Blinkit. They raised their revenue estimates for FY25E and FY26E by 22% and 33%, respectively. Despite higher ESOP costs and lower short-term EBITDA due to Blinkit’s expansion, they maintained a ‘Buy’ rating and raised the target price to ₹280 per share.

 

 

Key Growth Drivers

Several factors contribute to the positive outlook among analysts:

1. Strong Financial Turnaround: Zomato’s shift from a net loss to a net profit within a year is a significant achievement. This turnaround is supported by substantial revenue growth and improved operational efficiency.

2. Blinkit’s Break-Even: Achieving operational EBITDA break-even for Blinkit in March 2024 is a critical milestone. This indicates that the quick commerce arm is on a sustainable growth path, contributing positively to Zomato’s overall financial health.

3. Market Leadership: Zomato continues to strengthen its leadership in the food delivery sector. Its superior customer experience, including timely deliveries and diverse product assortments, gives it an edge over competitors.

4. Expansion Plans: Blinkit’s plan to double its dark store count by the end of FY25 is ambitious. While it may impact short-term profitability, it is expected to cement Blinkit’s position as a leader in quick commerce.

 

 

Short-Term Concerns

Despite the optimistic long-term outlook, there are some short-term concerns:

1. Stock Price Volatility: The 6% drop in Zomato’s share price following the Q4 results highlights market sensitivity. Investors may be wary of immediate financial impacts due to the aggressive expansion of Blinkit and higher ESOP costs.

2. ESOP Costs: Higher than expected ESOP costs have impacted margins. While these costs are a form of employee compensation, they can affect short-term profitability and investor sentiment.

3. Aggressive Expansion: Blinkit’s rapid expansion plan, while beneficial for long-term growth, may strain Zomato’s financials in the short term. Investors need to balance the immediate financial impact with the potential long-term gains.

 

 

Conclusion

The 6% drop in Zomato’s share price following the Q4 results could be seen as a temporary market reaction to short-term financial concerns. However, the underlying fundamentals of the company remain strong. Zomato has demonstrated significant financial improvement, with a notable turnaround from loss to profit and substantial revenue growth. Analysts are optimistic, maintaining ‘Buy’ ratings and raising target prices based on Zomato’s strong market position and Blinkit’s growth potential.

For investors, this dip in Zomato’s share price might represent a buying opportunity, particularly for those with a long-term investment horizon. The company’s strong financial performance, leadership in the food delivery market, and promising growth prospects for Blinkit suggest that the current price may be undervalued relative to its future potential. However, investors should also consider the short-term financial impacts of Blinkit’s aggressive expansion and higher ESOP costs.

Overall, while there are some risks, the long-term growth story of Zomato remains compelling.

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