ondc impact zomato: ONDC a threat to Zomato only if it scales up meaningfully, says Motilal Oswal

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After falling nearly 8% over the past three trading sessions, Zomato shares bounced back thanks to a report by Motilal Oswal which reiterated a ‘Buy’ on the stock, rejecting claims of an adverse impact from ONDC on the food delivery app for now.

“At its current scale, we do not have enough evidence to alter our base case for Zomato. We reiterate our BUY rating on the stock and a TP of Rs 70, implying a 15% potential upside,” Motilal Oswal said in a note.

The brokerage firm said that it did not perceive direct ordering as a major concern for the industry. However, it has acknowledged that ONDC could be a potential threat to Zomato “only if it meaningfully scales up across categories, allowing it to achieve greater efficiency compared to the walled gardens”.

“The delivery on ONDC apps is only free for the first order. In case of a discounted /free delivery, this cost has to be borne by the restaurant (possibly to increase competitive advantage against incumbent duopoly) and is not sustainable,” analysts at Motilal Oswal said.

Also, after the first free delivery, in some cases delivery charges is higher than Zomato/Swiggy, it added. Moreover, the difference in pricing is unlikely to be sufficient to override the wider selection of food options (early mover advantage) and a well-oiled delivery machine of incumbents, it said.

Although it added that if ONDC continues to scale up over time, this could become a significant risk, as it would enable greater delivery efficiency making the system sustainable.

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Zomato’s stock has been under the radar amid concerns about its profitability due to ONDC.”The food delivery business is still at a nascent stage in India with a long runway of growth. With a dominant market share and strong growth in the food delivery business and Hyperpure, we expect Zomato to report a strong 29% CAGR over FY23-25. While the management expects to turn profitable latest by 2QFY24, we believe the company should break even in FY25,” the report added.

ONDC or Open Network for Digital Commerce boasts 12 million sellers who sell and resell their products and services on its platform.

Meanwhile, BofA Securities has taken a ‘Neutral’ stance on Zomato while placing the price target at Rs 72. The foreign brokerage sees ONDC as a key platform in the food delivery space.

The brokerage firm also noted that the high-end users on Zomato/Swiggy are sensitive to delivery times and not necessarily very price sensitive. It further said that Zomato/Swiggy have an upper hand on the technology front which gives them better control over the time utilisation of delivery boys.

BofA expects newsflow on ONDC to continue which could keep Zomato stock prices volatile.

Earlier, market expert Deepak Shenoy, Founder of Capital Mind had also said that it was way too early to take a call on whether ONDC will affect Zomato’s business. “Of course, it is a challenge. It is a threat,” he had, however, acknowledged.

It will be seen in due course if this competition changes Zomato’s path to profitability, the Capital Mind expert opined.

Zomato shares were trading at Rs 62.20 on the NSE at 10:10 am, up Rs 1.25 or 2.05%.

The stock has underperformed Nifty50 and given returns of 8.9% over a 1-year period versus an 11.9% gain seen by the 50-stock index.

The stock has been highly volatile and traded with a 1-year beta of 1.54, the Trendlyne data suggested.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)

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