In the early trading hours of Tuesday, July 9, 2024, shares of foodtech major Zomato experienced a significant surge, jumping nearly 3% to reach a fresh all-time high of INR 214 on the Bombay Stock Exchange (BSE). This marked the continuation of a three-day rally driven by positive market sentiment and broader market uptrends. By the end of the trading session, Zomato’s stock closed at INR 212.5, reflecting a 2.2% increase.
Factors Driving the Stock Surge
Shareholders’ Approval for New ESOP Pool
One of the key drivers behind Zomato’s recent stock performance was the approval from shareholders to create a new employee stock option pool (ESOP) consisting of 18.26 crore shares. This move is seen as a strategic effort to attract and retain top talent in a highly competitive market. However, this development was not without its criticisms.
Suspension of Xtreme Logistics Business
Another significant development was Zomato’s decision to suspend its logistics business, ‘Xtreme,’ due to poor demand. While this might seem like a negative development, the market responded positively as it indicated the company’s focus on optimizing its operations and resources.
Market Sentiments and Broader Market Trends
The overall positive sentiment around Zomato and the uptrend in the broader market also played a crucial role in the stock’s performance. The market’s bullish outlook on the food delivery and hyperlocal delivery sectors contributed to the rising stock prices.
Analyst Perspectives and Price Target Adjustments
JM Financial’s Price Target Revision
Despite the positive sentiment, JM Financial revised its price target for Zomato to INR 230 from the earlier INR 250. The brokerage firm highlighted concerns regarding the newly laid-out ESOP policy, which, according to them, lacked measurable performance-based outcomes. JM Financial analysts suggested that the ESOP grants should be linked to specific performance parameters such as gross order value (GOV) growth, revenue growth, EBITDA growth, free cash flow from operations (FCFF) growth, profit after tax (PAT) growth, return ratios, or total shareholder returns.
The analysts emphasized the need for Zomato to publicly outline a formal policy where the eligibility and criteria for ESOP grants are clearly defined and tied to measurable performance outcomes. This transparency would help mitigate the risk of perceived unfairness among shareholders who might be concerned about the potential impact on their earnings in the medium term.
Kotak Institutional Equities’ Optimistic Outlook
In contrast, Kotak Institutional Equities maintained a more optimistic outlook on Zomato. The brokerage firm reiterated its ‘buy’ rating and set a fair value of INR 225. Kotak Institutional Equities anticipated healthy Q1 FY25 results for Zomato, driven by a 23% year-over-year (YoY) growth in food delivery gross merchandise value (GMV) and a 113% YoY growth in Blinkit GMV. The firm projected a PAT of INR 238.6 crore for the quarter.
Zomato’s Financial Performance and Market Position
Profitable Milestone
Zomato’s financial performance has been a critical factor in shaping market sentiment. The company first turned profitable in Q1 FY24, posting a PAT of INR 2 crore on an operating revenue of INR 2,416 crore. This marked a significant milestone for the company, signaling a shift in market perception. Since then, Zomato has reported increasing profits every quarter, culminating in a consolidated PAT of INR 175 crore in Q4 FY24.
Historical Stock Performance
Zomato’s stock journey has been notable, especially considering its all-time low of around INR 40 in July 2022, shortly after the acquisition of quick commerce startup Blinkit. Since then, the stock has experienced a remarkable turnaround, gaining over five times its value. This impressive recovery reflects the company’s strategic decisions and the market’s recognition of its potential in the food delivery and hyperlocal delivery sectors.
Strategic Implications and Future Prospects
Focus on Core Competencies
The suspension of the Xtreme logistics business highlights Zomato’s focus on its core competencies. By streamlining its operations and concentrating on areas with higher demand and profitability, the company aims to enhance its overall efficiency and financial performance.
Attracting and Retaining Talent
The creation of a new ESOP pool is a strategic move to attract and retain talented employees. However, the concerns raised by analysts underscore the importance of aligning such incentives with measurable performance outcomes. Clear and transparent criteria for ESOP grants can help ensure that these incentives drive desired behaviors and outcomes, ultimately benefiting both the company and its shareholders.
Navigating Market Dynamics
Zomato’s ability to navigate the dynamic and competitive foodtech landscape will be crucial in maintaining its growth trajectory. The positive sentiment around the company is bolstered by its robust financial performance and strategic decisions. However, continuous innovation, efficient resource management, and responsiveness to market trends will be essential in sustaining this momentum.
The recent surge in Zomato’s stock price, reaching an all-time high, is a testament to the positive market sentiment and the company’s strategic decisions. The approval of a new ESOP pool and the suspension of the Xtreme logistics business are significant developments that have influenced investor perceptions. While there are concerns about the new ESOP policy, the overall outlook remains optimistic, as reflected in the stock’s performance and analysts’ ratings.
Zomato‘s journey from its all-time low in July 2022 to its current high is remarkable, showcasing its resilience and adaptability in a competitive market. The company’s focus on core competencies, strategic use of incentives, and robust financial performance position it well for future growth. As Zomato continues to navigate the evolving market dynamics, its ability to innovate and efficiently manage resources will be key to sustaining its upward trajectory and delivering value to its shareholders.