Zomato shares have fallen 69% so far in 2022; What should investors do now?

Zomato shares an extended decline, with the stock hitting a new all-time low for the second consecutive day on Tuesday of Rs 44 apiece on BSE a day after the stock fell around 13% as the lock-up period for shareholders pre-IPO (developers, employees & other institutions) had ended.

Jefferies says the night is darkest before dawn; Hold purchase in stock

“Concerns over Fed tightening and investor focus on cash flow have weighed on internet names, including food tech, globally. From exuberance at the time of listing last year, Zomato is now unloved, having underperformed its peers year-to-date. The acquisition of Blinkit lengthens the path to profitability and despite management guidance on balance in food delivery, investors are not giving much benefit of doubt,” Jefferies said in a note.

The global brokerage thinks it makes a great case for LT (long-term) investors to buy Zomato shares and has a target price of Rs 100 on the stock.

“Zomato management has also accelerated its journey towards a better unit economy and is now looking at breaking even in the food delivery business for the foreseeable future. Adjusted Ebitda losses for 4QFY22 were less than US$30 million, with food delivery losses of US$10 million. We expect that to improve quarter after quarter now as a manager. reduces its CAC by tapping into its MAU to drive MTU, reduces rebates, increases participation rates, among others,” Jefferies added.

Unlike in the past, when Zomato intended to invest in multiple businesses, some strategic (looking at a potential merger) and others as a financial investment, the company now intends to hold on to cash. The company does not plan to commit resources to existing or now minority investments, the brokerage firm pointed out.

The one-year lock-up period for about 613 crores of shares, or 78% of Zomato’s shares, ended on July 23. Market analysts expected stocks to come under selling pressure this week. Zomato’s public offering was listed on BSE and NSE on July 23, 2021.

Under rules set by market regulator Sebi, those who held shares in a company before the IPO cannot sell their shares for a period of one year after the IPO.

“At the end of the one-year blocking period, shareholders in the pre-offer will be able to sell their stake in our company, depending on market conditions and their investment horizon. Additionally, any perception by investors that such sales might occur could also affect the trading price of the shares,” Zomato said in a Red Herring prospectus ahead of its IPO.

The food delivery company made a spectacular debut on Dalal Street on July 23. It issued shares at Rs 76 in the IPO, but quickly became a multibagger, hitting a lifetime high of Rs 169 on BSE. However, since then, the course has deteriorated as the euphoria among investors has faded. Analysts and investors began to question the company’s profitability plan even as Zomato had very little to show.

As of 10:16 a.m., the stock was trading down 7.04% on the National Stock Exchange at 44.25 rupees.

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