HSBC Says “Reduce” Zomato

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HSBC Says “Reduce” Zomato

By Aditya Raghunath -- HSBC, in its report on August 4, said that Zomato Ltd (NS: ZOMT ) might meet strong headwinds which will impact its numbers. It has a reduce call on the stock with a target price of Rs 112. The stock is currently trading at Rs 127.75, up 68% from its issue price of Rs 76.

HSBC said that while the company will see a massive volume growth as the economy reopens, it will also mean that the average order volume will fall. “In the near to medium term (post-COVID-19), volumes may grow strongly as office orders also come back, but that would mean a lower average order value (AOVs),” it said. HSBC estimates that AOV will fall 5% in FY22 and 6% in FY23.

It said that the opportunity is huge but it involved people consuming food differently, from home-cooked to restaurant meals. It added, “Which is why we think, while the long-term opportunity is real, the market may end up over-estimating growth in the near term.”

“While Zomato remains a compelling story, we believe the already lofty valuations factor in very optimistic estimates, and a glance at global peers (trading at 1-1.5x 12m forward EV/GMV vs 2.5x FY25e EV/GMV for Zomato) corroborates this,” the report added.

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