Zomato Finds Itself in an Enviable Position as Stock Surpasses IPO Price. What Next?

These days, it's not rare to come across a newspaper headline commenting on a tech company's layoffs and incoming financial problems.

Back in 2020, when sectors such as travel and hospitality came to a standstill, the tech industry forced employees to work from home without causing any disruption.

The optimism surrounding hiring was at an all-time high. And that's the reason experts predicted the technology sector would be unaffected by the recession.

But now with tech companies leading the charge when it comes to layoffs, the new data is surely suggesting that previous assumptions were inaccurate.

Nonetheless, some tech stocks are performing well and making the most of this bullish market environment.

Take the stock of Facebook for example. While Meta Platforms has announced massive layoffs, the stock is up over 50% in the past one year and over 110% in 2023 so far.

If we take an Indian company's example, share price of Zomato has rallied hard off the bottom of Rs 40 per share price.

The stock is now retesting its IPO price of Rs 76 per share.

Let's find out what's behind the sudden optimism and what lies ahead for the tech company.

Why Zomato share price is rising

#1 Narrowing losses

Last month on 19 May 2023, Zomato reported its quarterly results where it turned EBITDA positive at Rs 280 million (m).

The company is now hoping to achieve net profit on a consolidated basis in the next four quarters.

In the March 2023 quarter under review, Zomato narrowed its losses to Rs 1.9 billion (bn) from Rs 3.6 bn a year ago, and Rs 3.5 bn a quarter ago.

This was on the back of a 70% increase in revenue to Rs 20.6 bn, helped by growth in its B2B supplies business, Hyperpure.

With the cash burn reducing every quarter due to improvement in financial performance, things are looking way better than estimated.

#2 Change in management

Last month, Zomato had rejigged its top management.

Rakesh Ranjan, who previously led Hyperpure, took over as the CEO of Zomato. He has played multiple roles in Zomato over the last six years, including as Global Business Head in charge of Zomato Gold, and as its Chief Sales Officer.

Meanwhile, the company appointed Rishi Arora as the CEO of Hyperpure. He was one of ?Blinkit?'s early executives who was elevated to the role of co-founder last year.

In a filing to exchanges, the company said,

• We believe that a change of leadership every now and then with capable people at the helm brings new perspectives to the business enabling it to evolve faster. Such leadership changes are also great for people development, and we are confident that our people strategy will set us up for success even decades from now.

In January 2023, a series of top-level exits at Zomato had the restaurant ecosystem worried. Its co-founder and chief technology officer, Gunjan Patidar, resigned in January 2023.

In November 2022, it saw the exit of another co-founder, Mohit Gupta, besides the head of new initiatives Rahul Ganjoo and vice president, global growth Siddharth Jhawar.

#3 Revision in discounts at ONDC

The other reason why Zomato share price is rising is due to speculative reports stating there will be revision of discounts at the Open Network for Digital Commerce (ONDC).

According to reports, ONDC had revised its incentive scheme for network participants to reduce the dependency on discounts for adoption.

Under the new regime, the maximum pricing incentive will be capped at Rs 100 per order, which was Rs 120 per order earlier. Also, the total incentive will not exceed 50% of the total order value, including the shipping charges.

Last month, investors became wary amid fears of the food-tech sector being disrupted by a new entrant - ONDC.

At present, Zomato and Swiggy are two of India's leading food delivery platforms that capture the lion's share. But the competition has intensified following ONDC's launch, which allows customers to order food and groceries without the need of a third-party app like Zomato and Swiggy.

What next?

The fundamentals of the company have been improving. It's not all bad for the stock.

Also, in the near term, the impact of ONDC is unlikely to be significant on Swiggy and Zomato. The ONDC network is still small. But as ONDC scales up, there will be some impact.

Most people who are using ONDC now are doing so because of the discounts. And these discounts only exist because the network is small. Once ONDC scales up and becomes sustainable, the discounts are likely to vanish.

Zomato has a sizeable market share with the top two players (Zomato and Swiggy) dominating the segment. Though Amazon and others have planned to enter this space, it will take some time before they reach the higher level and compete with Zomato and Swiggy.

Another growth prospect for Zomato is it operates in a largely untapped market.

However, Zomato still remains a loss-making entity at the net profit level. Given the quantum of ESOP costs, and an increasingly competitive market, we think the road to profitability still remains long and unclear.

To know more, watch the below video by Aditya Vora where he decodes what investors and traders should do with the stock of Zomato.

How Zomato share price has performed recently

In the past one year, Zomato share price has gained 13%. In 2023 so far, the stock is up 30%.

In the past five days, the stock has rallied around 10%. It's now trading above the IPO price of Rs 76.

Zomato hit the market at a listing price of Rs 115 on 23 July 2021 against its issue price. It closed with a listing day gain of 65.6% at Rs 125.85.

The company is still 52.5% below its all-time high price of Rs 159.75 touched in November 2021.

Have a look at the table below to compare it with other tech companies.

Comparative Analysis

Company	Zomato	Nykaa	IndiaMart
ROE (%)	-4.9	1.8	14.6
ROCE (%)	-5.0	8.2	19.3
Latest EPS (Rs)	-1.1	0.1	92.7
TTM PE (x)	0.0	0.0	60.3
TTM Price to book (x)	3.4	28.7	8.4
Dividend yield (%)	0.0	0.0	0.4
Industry PE	0.0
Industry PB	5.4

Data Source: Ace Equity

About Zomato

Zomato was incorporated in the year 2010. The company, during its initial stages, started off as a restaurant finder.

Following in the footsteps of its competitor, Swiggy, the company formally launched its food delivery service in India in the year 2015.

By 2020, Zomato expanded its food delivery business to over 500 cities, facing stiff competition from both Swiggy and Uber Eats.

However, during the same year, the company acquired Uber Eats to consolidate its position in the food delivery space.

For more details, check out Zomato company fact sheet and quarterly results.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...