Zomato Stock May See Near-Term Correction, 2024 Outlook Less Compelling: HSBC
HSBC does not expect the third quarter to beat expectations and sees it possibly marginally weaker than the second quarter.
Zomato Ltd.'s food value is well captured in the current stock price, and future gains will largely be driven by the quick-commerce operations, according to HSBC Global Research.
It has maintained a 'buy' rating on the stock and increased the target price to Rs 150 from Rs 140, implying an upside return potential of 11.7%. There is an expectation that profitability improvement will be gradual in the near term, and hence, the market focus will be on QC growth, according to a note on Wednesday.
The research firm underlined that 2024 might not be as compelling as last year for the stock, and there is a possibility of some correction in the near term as well, although its long-term view remains constructive.
Q3, Q4 Unlikely To Drive Major Earnings Upgrade
After the bumper second-quarter beat, HSBC does not expect the third quarter to beat expectations and sees it as possibly slightly weaker than the second quarter.
It expects the gross-order value growth in food delivery to moderate sequentially. "Margin improvement is likely to be gradual, as the GOLD impact is yet to unwind."
The QC should continue to grow strongly in the third quarter. Blinkit's GOV growth will be strong again this quarter, according to HSBC.
With a focus on growth, improvement in margin can be gradual, it said. "We see QC growth in the next three years in the range of 40–50%, with anything below a negative surprise for the stock."
Long-Term Focus On Growth, Advertising Revenue
In the long-term, HSBC sees advertising revenue as the driver of almost the entire profitability of the business. It conservatively expects the advertising revenue to grow to 6% of the gross merchandise volume in two to four years.
Currently, Blinkit is mostly attracting customers' sales-promotion budgets and the research firm sees addressable spend growing materially if the company is able to target these customers' corporate-level marketing spend.
Zomato's stock rose as much as 2.45% intraday to Rs 137.95 apiece, a 52-week high. It was trading 2.01% higher at Rs 137.35 apiece, compared to a 0.22% advance in the benchmark Nifty 50 at 11:54 a.m.
The share price has risen 80.53% in the last 12 months. The relative strength index was at 69.
Twenty-five out of the 29 analysts tracking the company have a 'buy' rating on the stock and four suggest a 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential downside of 0.5%.
