HSBC Sees 19% Downside In Zomato Stock; Cuts Rating To Reduce…

After a stellar listing in July that saw its market-capitalisation (market-cap) hit the Rs 1 trillion mark, analysts now seem to be turning cautious on the stock of food delivery major Zomato. In a report dated August 4, HSBC has cut its rating on Zomato to ‘reduce’ and has maintained a price target of Rs 112 on the stock, translating into a downside of Rs 26, or 19 per cent, from the current levels.
Food delivery investors in India, according to HSBC, face three key challenges. First, unlike most e-commerce segments, food delivery will need to see profound cultural evolution, as there are longstanding inhibitions against eating ‘non-home-cooked food’. Secondly, diversification into e-grocery may not be as easy as it seems given cash burn. Lastly, HSBC believes the current valuations are ‘too punchy’ and factor in aggressive growth forecasts.
The evolution of average order values (AOVs) along with growing volumes will be the most critical moving part in the unit economics of Zomato, HSBC said. Volumes stood at around 1.5 million per day in pre-Covid times for Zomato, the report said, with an average order value (AOV) of Rs 280. However, in just one year, AOVs have gone up to Rs 400. As life normalises post-COVID, HSBC predicts a sharp growth in volumes, led by office orders coming through. However, that would also mean AOVs moderating. HSBC forecasts a 5 per cent fall in FY22e and another 6 per cent fall in FY23e in AOVs.

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