Mutual funds make most buying in Zomato shares in July. Should you invest?

During the dark days of July, when a deep bear run toppled the online food delivery company, Zomato’s shares to its all-time low on exchanges, mutual funds managers had a different opinion. Zomato emerged as the most bought stock in July by asset management companies (AMCs). Mutual fund houses such as HDFC AMC, UTI AMC, and Nippon AMC were some of the investors in Zomato during the month under review. Notably, the selling pressure in Zomato has eased starting this month and the shares have skyrocketed nearly 41% so far. Analysts are of mixed opinion on Zomato shares going forward.

As per ICICI Direct’s data, in July, the market value of Zomato across AMCs climbed strongly to 1,343 crore compared to 963 crore in June month. There was a huge buying in Zomato shares to the tune of 28.71 crore shares in July compared to 17.89 shares in June this year.

Further, the data revealed that HDFC AMC’s holding in Zomato shares increased by more than 707% to 1.13 crore shares in July compared to 14 lakh shares in June. The market value of the mutual fund jumped to 53 crore in Zomato against 8 crore in the previous month.

In July, Nippon AMC’s holding in Zomato climbed nearly 282% to 9.51 crore shares against 2.49 crore shares in June. The market value in Zomato soared to 445 crore, more than tripled from 134 crore in June.

Meanwhile, UTI AMC’s holding in Zomato surged over 12% to 3.49 crore shares in July versus 3.11 crore shares in June. The market value in the shares, however, declined to 163 crore in July 2022 against 167 crore in the previous month.

Equity-oriented schemes recorded a net inflow of 8,898.25 crore in July, lower than 15,497.76 crore in the previous month.

Journey of Zomato shares from bears to bulls:

Zomato shares have been on a roller coaster ride since the start of this year. In July, the shares faced a steep downside to the point it even touched an all-time low of 40.55 apiece on BSE. A free fall was seen right after investors’ lock-in period on the shares ended on July 25. Overall, in the month, Zomato had faced a nearly 20% drop in its shares.

However, markets have been on a bullish tone so far in August, and Zomato shares have also recovered from major losses OF July after its earnings announcement for the quarter ending June 30, 2022 (Q1FY23). From August 1 to August 17, Zomato shares have skyrocketed by at least 40.88%.

On Wednesday, Zomato shares closed at 65.30 apiece up by 1.63% on BSE. The company’s market valuation is around 51,718.95 crore.

Should you invest in Zomato shares?

In Q1FY23, Zomato narrowed its consolidated loss to 185.7 crore compared to a loss of 356.2 crore in the same quarter last year. Consolidated revenue stood at 1,413.9 crore in Q1FY23 rising by a whopping 67.44% yoy and 16.68% qoq. Overall, the adjusted loss in EBITDA narrowed to 150 crore in Q1FY23.

Analysts at JM Financial said, “Zomato reported picture-perfect results in 1QFY23. Food Delivery GOV grew a robust 10% QoQ (in-line JMFe) while contribution margin reported a sharp jump to 2.8% (vs. JMFe of 1.9%) from 1.7% in 4QFY22. Higher take-rates and decline in subsidies borne by the company on delivery fees were key drivers of contribution margin expansion. The company also continued to benefit from strong operating leverage, as a result of which Adj. EBITDA loss % narrowed from 18.5% in 4Q to 10.6% in 1Q (better than JMFe of 15.2%). Blinkit’s financial and operating metrics for Jul’22 were also far better than our expectation.”

Further, the analysts said, “Another positive was the fact that the management attempted to address investor concerns on Blinkit through its shareholder letter while also re-iterating its commitment to conserve cash by not making any further minority investments. In fact, the company slashed its capital allocation towards ramp-up of Quick Commerce (Blinkit) business to <USD 320mn over CY22-23 versus prior guidance of <USD 400mn.”

“While management has guided for the core business to turn Adj. EBITDA break-even by 4QFY23 (worse case by 2QFY24), we believe accelerated profitability may be hard to achieve without severely compromising on growth. We therefore forecast Adj. EBITDA break-even for Zomato only by 1HFY25, while marginally tweaking down our GOV estimates over FY23-25E to account for macro headwinds,” JM Financial analysts said.

On the stock price, these analysts in their note said, “We repose strong faith in Zomato as we believe it is well positioned to benefit from robust industry tailwinds. While we retain our 15-Yr DCFbased TP for core business at 115, Blinkit merger can add ~8% value to our TP.”

Meanwhile, analysts at Dolat Capital have given a ‘sell’ rating on the company. The analysts here said, “Rising Contribution (~Rs10/order) with decent growth in GOV (MTU up 6.4% QoQ at 16.7mn), suggests that the revenue momentum is healthy, however, we believe bulk of the savings came from avenues that are transitory (Monthly churn rate are 18%, Delivery Cost to increase, employee cost). Although narrowing of losses was encouraging, the Blinkit integration would mean losses would reach Newer High in H2. With Cash generation still couple of years away (Expect to turn profitable by FY27E), we maintain our Sell rating and DCF based TP of Rs48.”

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