Zomato Shares Face Major Setback
Zomato, once a darling of the Indian stock market, is experiencing turbulence as shares fell sharply by 5%, reaching Rs 252.05 on Tuesday. This decline follows a downgrade by global brokerage firm Jefferies, which shifted its recommendation from a “buy” to a “hold” on the stock. Furthermore, Jefferies slashed its target price on Zomato by 18%, from Rs 335 to Rs 275, sending shockwaves through the market. The revised target price is now in line with Zomato’s closing price of Rs 264.6 on Monday. As of now, Zomato shares have fallen by 13% from their recent high of Rs 304. What does this downgrade mean for Zomato and its investors? Let’s take a closer look.
Zomato Shares: A Look at the Recent Fall
Why Did Zomato Shares Fall?
The drop in Zomato shares is largely attributed to Jefferies’ cautious outlook on the company’s future performance, particularly in the face of growing competition. While Zomato had previously been on a strong growth trajectory, recent developments have led analysts to rethink their forecasts. The decline is primarily attributed to the following factors:
- Jefferies Downgrade: The downgrade from “buy” to “hold” raised immediate concerns among investors.
- Competition in Quick Commerce: Intensifying competition from rivals such as Swiggy’s Instamart, Zepto, and Amazon is creating a more challenging landscape for Zomato.
- Profitability Concerns: The brokerage warned that these competitive pressures might affect Zomato’s medium-term profitability.
Target Price Slashed to Rs 275
Jefferies’ decision to cut its target price by 18% from Rs 335 to Rs 275 signals a more cautious stance on Zomato’s future potential. The downgrade and the lowered target price are in response to various headwinds the company is facing, including the rapidly expanding quick commerce market.
Zomato’s Stock Movement Over Time
After hitting a record high of Rs 304 recently, Zomato’s stock has taken a 13% dip, showcasing the volatile nature of its stock performance. This decline is especially notable given the company’s impressive growth in the past year, during which it gained over 130% in returns.
Impact of Increased Competition on Zomato Shares
The Rise of Quick Commerce: A Major Challenge
One of the primary reasons behind Jefferies’ revised outlook is the increasing competition in the quick commerce space. Quick commerce, or the rapid delivery of goods, has become a fiercely competitive sector, with players like Swiggy’s Instamart, Zepto, and Amazon making aggressive moves in the market. This expansion is directly challenging Zomato’s Blinkit, its own quick commerce platform.
Zomato’s Blinkit vs. Competitors
- Zomato Blinkit: Zomato’s Blinkit was previously a strong player in the quick commerce market but now faces stiff competition.
- Rivals: Competitors such as Instamart and Zepto have significantly ramped up their services, creating more pressure on Blinkit’s market share.
- Amazon’s Entry: Amazon, a key player in e-commerce, is also aggressively targeting the same market, making it even harder for Zomato to maintain profitability.
Price Wars and Discounting Impact
As competition intensifies, price wars and aggressive discounting are expected to become more common, further squeezing profitability in the sector. Zomato’s ability to sustain profitability amid such pressures remains uncertain, leading to caution from analysts.
Jefferies’ Revised Earnings Forecasts for Zomato
Cutting Earnings Projections: What’s Behind It?
Jefferies has significantly lowered its earnings forecasts for Zomato, particularly for its Blinkit division. The firm has reduced its earnings estimates for FY26-27 by 12-15%. This downgrade is seen as a direct response to the expected consolidation in the quick commerce sector, where increased competition could hurt Zomato’s growth.
- Blinkit EBITDA Estimates: Jefferies has halved its target multiple for Blinkit to 6x, signaling a more cautious outlook.
- Zomato Consolidated EBITDA: Overall, Jefferies has also cut its consolidated EBITDA estimates for Zomato by 12% for FY26 and 15% for FY25.
- Profitability Forecasts: Profitability is expected to take a hit, with estimates slashed by 17% for FY26 and 18% for FY27.
Zomato’s Earnings History: A Positive Outlook in the Past
Despite the current negative sentiment, Zomato’s recent earnings report shows a 389% growth in net profit for the July-September quarter, reaching Rs 176 crore. Additionally, the company posted a 69% YoY rise in revenue to Rs 4,799 crore in Q2.
The Long-Term Outlook for Zomato Shares
2025: A Year of Consolidation for Zomato?
Jefferies expects 2025 to be a year of consolidation for Zomato. After an impressive rally in 2024, in which its stock price more than doubled, the brokerage firm believes the company will face headwinds in the coming year.
- Consolidation Phase: Zomato’s stock is expected to stabilize as the company navigates increasing competition and the potential effects of aggressive pricing strategies by its competitors.
- Growth Potential: While Zomato has a strong track record of execution and growth potential, the next phase might not see the same meteoric rise in stock price.
FAQs on Zomato Shares and the Recent Downgrade
1. Why did Zomato shares fall by 5% recently?
Zomato shares fell by 5% following a downgrade by Jefferies, which lowered its target price from Rs 335 to Rs 275. The downgrade was prompted by increased competition in the quick commerce market and concerns over profitability.
2. What does the downgrade by Jefferies mean for Zomato?
The downgrade means Jefferies no longer believes that Zomato is a strong buy. The revised target price indicates a more cautious outlook, with the firm predicting that competition will hurt Zomato’s profitability in the medium term.
3. How has Zomato performed in the past year?
Zomato has delivered an impressive 130% return over the past year, significantly outperforming the market. However, recent concerns about competition have dampened the outlook.
4. What is the outlook for Zomato in 2025?
Jefferies expects 2025 to be a year of consolidation for Zomato, with its stock price stabilizing as the company faces intense competition and aggressive pricing strategies.
5. How does the competition affect Zomato’s Blinkit platform?
Zomato’s Blinkit is facing increased competition from companies like Swiggy’s Instamart, Zepto, and Amazon. This could affect Blinkit’s market share and profitability in the future.
6. What are the long-term prospects for Zomato shares?
While Zomato has strong execution capabilities, the long-term prospects are uncertain due to intense competition. Investors will need to monitor how the company adapts to market changes in the coming years.
Conclusion: A Pivotal Moment for Zomato Shares
Zomato shares have taken a hit following Jefferies’ downgrade and the lowered target price. While the company has demonstrated impressive growth in the past, it now faces significant challenges from aggressive competitors. The long-term outlook for Zomato remains uncertain, with analysts expecting a period of consolidation in 2025. Investors should remain cautious as Zomato navigates these turbulent waters.
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