Zomato, the renowned food delivery platform, witnessed a sharp 6% decline in its stock to Rs 182.10 on the Bombay Stock Exchange (BSE), raising eyebrows among investors.
This drop comes in the wake of the company’s decision to increase its Employee Stock Option Plan (ESOP) pool by 2%.
However, leading brokerages remain optimistic, elevating their target prices up to Rs 280 per share, following Zomato’s strong performance in the fourth quarter.
Brokerage Outlook
Brokerage firms, including CLSA, Jefferies, Bernstein, and Elara Capital, revised their target prices for Zomato, reflecting confidence in its business model and growth prospects.
CLSA upgraded its target to Rs 248, Bernstein and Jefferies to Rs 230, and Elara Capital placed the highest bet at Rs 280. Their optimism is rooted in Zomato’s food delivery service and the rapid growth of Blinkit, its quick commerce platform.
Strong Performance and Expansion Plans
Zomato’s fourth-quarter showcased a solid 73% year-over-year revenue increase, reaching Rs 3,562 crore. This growth was driven by a 48% increase in food delivery, a 112% rise in Blinkit, and a 99% surge in Hyperpure, Zomato’s supply chain solution for restaurants.
The company plans to escalate Blinkit’s dark stores count to 1,000 by the end of FY25, up from 525 in the last quarter of FY24, indicating a significant strategic shift and expansion in quick commerce.
The ESOP Headache
The announcement of an expanded ESOP pool has been met with mixed reactions. Kotak maintains a buy call on Zomato with a target price of Rs 225, slightly adjusting revenue estimates due to increased Blinkit revenues but cutting EPS estimates because of the enlarged ESOP pool and anticipated near-term profitability dips in Blinkit.
Elara Capital noted the ESOP decision might negatively impact food delivery valuation by 10%, aligning the reduced EBITDA estimates for the segment.
Market Reactions and Investment Considerations
The ESOP expansion and its potential effects on profitability and valuation have left investors wondering whether to buy, sell, or hold their Zomato shares.
Despite the stock’s dip, the raised target prices by brokerages suggest a belief in Zomato’s growth story, especially with its leverage in the food business and Blinkit’s promising trajectory.
Assessment
For investors, the current scenario presents a nuanced decision-making landscape. While the immediate stock dip might prompt concerns, the long-term vision laid out by Zomato and the confidence shown by brokerage firms suggest that staying the course might be worthwhile.
Yet, each investor will need to weigh the potential risks against the projected growth, keeping an eye on how Zomato manages its expansion and financial health moving forward.
Final Thoughts
As Zomato navigates the complexities of expanding its operations and its ESOP pool, investors are closely watching. The company’s robust performance and strategic moves signal a strong foundation for future growth.
However, market reaction to ESOP decisions reminds stakeholders of the delicate balance between rewarding employees and maintaining shareholder value.
