Zomato stock upgraded to Buy by BofA Securities on strong Blinkit growth

BofA Securities upgraded Zomato to Buy from Neutral, raising its price target to INR350.00 from INR280.00, following stronger-than-expected Q1 results driven primarily by its quick commerce unit, Blinkit. Blinkit demonstrated 26% quarter-over-quarter GMV growth and 40% revenue growth, prompting BofA to project continued market share gains and improved margins, with management planning store count expansion to 3,000. This upgrade signals confidence in Zomato's profitability trajectory, despite slower but normalized growth in its food delivery segment.

Analysis

BofA Securities has upgraded Zomato to Buy from Neutral, increasing its price target to INR350.00 from INR280.00. The upgrade is directly attributed to the significant outperformance of Zomato's quick commerce division, Blinkit, which posted robust 26% quarter-over-quarter GMV growth and 40% revenue growth. BofA's report suggests Blinkit is gaining market share, a trend expected to continue as management plans to expand its store count to 3,000. The outlook for profitability is also improving, with management indicating that margins have bottomed. BofA projects that operational enhancements like the IOCC could improve Blinkit's medium-term EBITDA margins by approximately 1%, with a potential for steady-state margins of 5-6% of Net Order Value and a return on capital employed (ROCE) around 40%. This strong performance in quick commerce offsets the known slowdown in the core food delivery segment, for which BofA forecasts a normalized medium-term growth rate of 18-20%.

Key Decisions for Investors

• Investors should consider the thesis that Zomato is re-rating as a quick commerce leader rather than just a food delivery service, given Blinkit's superior growth and margin potential.
• It is crucial to monitor Blinkit's execution on its store expansion to 3,000 units and a corresponding improvement in EBITDA margins, as these are the key assumptions supporting BofA's upgraded price target.
• While the Blinkit growth story is compelling, investors should remain cognizant that the core food delivery business growth has normalized to 18-20%, making the stock's performance highly dependent on the continued success of the quick commerce strategy.