Motilal Oswal has issued a BUY recommendation for Zomato with a target price of Rs 320, representing a 21% upside from the current market price of Rs 265. Zomato's leadership in the food delivery business continues to strengthen, and its quick commerce subsidiary, Blinkit, shows significant potential in the rapidly expanding market. The company has demonstrated consistent growth in key financial metrics, with a projected FY24-27 revenue CAGR of 55%. Investors are encouraged to take advantage of this upward trajectory, particularly given Zomato’s dominance in the food delivery space and Blinkit's growing foothold in quick commerce.

Zomato's Dominance in Food Delivery

Zomato has emerged as a clear market leader in India's food delivery sector. Key metrics demonstrate its ability to sustain this leadership:

Market share growth: Zomato's market share in food delivery has expanded from 54% in FY22 to 58% in Q1FY25, highlighting its robust execution.
Customer engagement: Zomato boasts an impressive 20.3 million Monthly Transacting Users (MTUs), about 40% higher than Swiggy’s 14 million MTUs.
Profitability: Zomato’s food delivery segment now operates with a stable EBITDA margin of 3.4%, a clear indicator of its profitability, compared to Swiggy’s lower EBITDA margin of 0.8%.
Key takeaway:
Zomato’s growth in both market share and profitability reflects its well-executed strategy, with solid customer engagement metrics underscoring its leadership in the competitive food delivery market.

Blinkit: Strong Position in Quick Commerce

Zomato's acquisition of Blinkit (formerly Grofers) is a strategic play aimed at capturing the fast-growing quick commerce market, and the early results are promising:

Store network: As of Q1FY25, Blinkit operated 639 dark stores across 44 cities, compared to Swiggy Instamart’s 557 stores in 32 cities.
Gross Order Value (GOV): Blinkit outperformed Swiggy Instamart with an 81% higher GOV in Q1FY25 (Rs 49,230 million vs. Rs 27,196 million).
Take rates and margins: Blinkit’s take rate of 19.1% in Q1FY25 outpaces Instamart’s 14.8%, driving a significantly better EBITDA margin of -0.1%, compared to Instamart’s -11.7%.
Key takeaway:
Blinkit has established itself as a strong player in the quick commerce space, with better margins and take rates than its peers. Despite the competitive landscape, Blinkit's performance positions Zomato to capture significant market share in this growing segment.

Financial Performance and Valuation

Zomato's financials reflect a robust growth trajectory, bolstered by its dominant market position and efficient cost structures. Key financial metrics include:

Revenue growth: Zomato's revenue is expected to grow from Rs 121.1 billion in FY24 to Rs 454.2 billion by FY27, with a CAGR of 55%.
Profitability: Zomato is expected to generate a PAT margin of 4.3% in FY25, increasing to 13.2% by FY27 as operating leverage kicks in.
Return on Equity (RoE): Zomato’s RoE is forecasted to rise significantly, from 4.2% in FY25 to 22.1% in FY27, demonstrating improved capital efficiency.
Valuation: The stock is trading at an EV/Sales multiple of 11.1x for FY25, with a potential upside of 21% based on a target price of Rs 320.
Key takeaway:
With impressive growth in revenue and profitability, Zomato remains well-positioned to deliver substantial returns to investors. Its strategic initiatives in both food delivery and quick commerce are expected to continue driving strong financial performance over the coming years.

Challenges and Competition

Despite its dominant position, Zomato faces a few competitive and operational risks:

Competition with Swiggy: While Zomato has gained market share, Swiggy’s innovation in areas like 10-minute food delivery (via Bolt) poses a potential challenge. Swiggy has proven adept at launching new services, and its customer cohorts exhibit higher GOV per MTU, indicating mature and sticky users.
Quick commerce rivalry: Blinkit may lead Instamart in several metrics, but Zepto continues to perform well, adding to the competitive pressure in this fast-evolving market.
Key takeaway:
The competitive landscape is intense, but Zomato’s strong execution capabilities and market leadership in both food delivery and quick commerce provide it with a solid defensive moat.

Investment Risks

While Zomato's outlook is promising, there are inherent risks:

Intensifying competition: Both in food delivery and quick commerce, Zomato faces stiff competition from Swiggy, Zepto, and other emerging players, which could erode its market share.
Profitability risks: Although Zomato’s food delivery business has turned profitable, sustained profitability in quick commerce is still a challenge.
Economic downturn: An economic slowdown could reduce discretionary consumer spending, impacting order volumes and growth prospects.
Key takeaway:
Investors should remain aware of these risks but can take comfort in Zomato’s track record of execution and its leadership position in the market.

Conclusion and Target Price

Motilal Oswal’s BUY recommendation for Zomato comes with a target price of Rs 320, offering a 21% upside from the current price of Rs 265. Zomato’s market leadership in food delivery and Blinkit’s strong performance in quick commerce make it a compelling investment case. With a projected 55% CAGR in revenue and improving profitability metrics, Zomato is well-positioned to continue delivering strong financial results.

Key takeaway:
Zomato’s robust growth potential, market dominance, and improving profitability make it an attractive investment for both short-term gains and long-term value creation. Investors looking to capitalize on the evolving food delivery and quick commerce sectors should consider adding Zomato to their portfolios.