Goldman Sachs sees 30% upside in Zomato, reiterates buy

Global investment bank Goldman Sachs has reiterated its buy call on Zomato for target price of Rs 240, indicating an upside of 30 per cent from Thursday’s closing price. Zomato's quick commerce segment, particularly led by Blinkit, has demonstrated remarkable growth and profitability, exceeding previous estimates, Goldman Sachs said in a report.

The report highlights Zomato's exceptional performance in both revenue and growth, with Blinkit's Gross Order Value (GOV) estimated to be approximately 50 per cent higher than anticipated for the fiscal year 2025.

The surge in growth is attributed to several factors, including the analysis of the Total Addressable Market (TAM), economic viability, and industry structure for quick commerce. Blinkit is projected to achieve 53 per cent Compound Annual Growth Rate (CAGR) in GOV from FY24 to FY27, which subsequently propels Zomato to achieve 32 per cent adjusted revenue CAGR, marking it as the highest within both the global food delivery and India internet sectors.

Despite Zomato's remarkable stock performance, trading at a 219 per cent increase over the last 12 months, the report suggests that the stock is undervalued, trading significantly lower than comparable companies in the market. The report reiterates a "Buy" recommendation on Zomato's stock, projecting a 30 per cent upside potential.

The driving force behind Zomato's quick commerce growth, as identified by Goldman Sachs, lies in three key requirements for a successful business model: high population density urban centres, a large unorganised supply chain, and a low rider cost to Average Order Value (AOV) ratio. These factors contribute to the platform's ability to offer competitive pricing, wider assortments, and efficient delivery services, thereby attracting demand and ensuring profitability.

The analysis further reflects India's unique market dynamics, where the prevalence of unorganised retail creates opportunities for online platforms like Blinkit to offer products at lower prices compared to traditional brick-and-mortar stores. The pricing advantage, coupled with a diverse product range and swift delivery times, positions quick commerce platforms for continued growth and market expansion.

Regarding the Total Addressable Market (TAM) for quick commerce, Goldman Sachs estimates potential, particularly in urban areas, with a projected market size of approximately $300 billion. With only a fraction of this market currently tapped into, there remains ample room for growth and market penetration, especially as quick commerce platforms expand their presence to more cities and categories.

Competition in the online grocery space is acknowledged, with various players vying for market share. However, Goldman Sachs predicts that quick commerce platforms, including Blinkit, are poised to capture a substantial portion of the market share in the coming years, driven by factors such as pricing, delivery times, and product assortment.