Zomato’s Sensex Debut Replaces JSW Steel: Stock Jumps 7% in a Major Milestone
Zomato's stock price surged by 7% after the announcement that it will be included in the BSE Sensex, a benchmark stock market index in India, starting on December 23, 2024. The stock finally settled at 3.45% 1-day growth at the end of the trading hours (3:30 PM, November 25). The company's stock will replace JSW Steel. This inclusion is part of the index's regular rebalancing process. Additionally, Zomato will be included in the Futures & Options (F&O) segment starting November 29, 2024.
Impact on JSW Steel
JSW Steel's exclusion from the Sensex is expected to lead to some fund outflows in the near term as passive funds and ETFs adjust their portfolios. However, ICICI Securities maintains a positive long-term outlook for JSW Steel, citing the company's ambitious expansion plans and robust profitability guidance.
Zomato Stocks Performance Highlights
Zomato's stock has shown good growth, rising 125% in 2024 compared to an 11% increase in the BSE Sensex. Over the past year, the stock has delivered a 130% return, outperforming the Sensex's 20% gain. Among new-age companies, Zomato has emerged as a consistent performer, with a 146% rise over the past year, 53% in the last six months, 125% in 2024, and 10.5% growth in the previous month.
Zomato's Financial Performance
Zomato's financial performance highlights significant growth. In Q2 FY25, the company posted a net profit of Rs 176 crore, a 388% jump from the previous year. Revenue from operations also surged 68% year-on-year to Rs 4,799 crore, driven by solid performance in key segments like food delivery and the expansion of its quick-commerce business, Blinkit.
Blinkit: A Game-Changer in Quick Commerce
Blinkit, Zomato's quick-commerce arm, presents a generational opportunity to disrupt industries such as retail, grocery, and e-commerce. In Q2 FY25, Blinkit's GOV grew 24.6% quarter-on-quarter and 122.2% year-on-year to reach Rs 6,130 crore. This growth is partly attributed to the addition of 152 new stores during the quarter.
Strategic Capital Raise to Counter Competition
Zomato plans to raise Rs 8,500 crore via a QIP to bolster its financial flexibility and navigate the increasingly competitive quick-commerce landscape. This move is seen as a response to rival Swiggy's recent IPO, which raised Rs 11,300 crore. The capital raise should allow Zomato to continue scaling Blinkit and potentially adjust its ownership structure to favour Indian investors, enabling inventory holding in its quick commerce business.
Future Outlook
Zomato's management expects the going-out segment's GOV (Gross Order Value) to grow more than threefold in the future. Analysts at Geojit Financials believe that improving performance metrics and growth in key areas such as orders, average order value, and new user acquisition should drive profitability. Zomato is also expected to join the Nifty 50 index, potentially attracting $607 million in fund inflows.
Overvaluation of Stock
One significant negative aspect of Zomato is its highly overvalued stock, as evidenced by its astronomical P/E ratio. As of the latest reports, Zomato's P/E ratio stands at approximately 326, which indicates that investors are paying an extremely high price for each unit of earnings the company generates. This figure is substantially above the average P/E ratio for tech companies, suggesting that the stock price has surged disproportionately compared to its earnings growth23.
The elevated P/E ratio has led to skepticism among investors regarding Zomato’s ability to sustain such valuations in the long term. Analysts have pointed out that much of the current valuation is tied to expectations around rapid growth in segments like Blinkit, which faces fierce competition from established players like JioMart and Flipkart1.