Motilal Oswal sees ONDC as a threat to Zomato only if scaled up meaningfully

The brokerage house has reiterated the ‘buy’ rating on Zomato and a target price of Rs 70 a share, implying a 15 percent potential upside from current market price

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There’s not enough evidence for Motilal Oswal Securities to alter its base case for Zomato with the emergence of Open Network for Digital Commerce (ONDC).

The brokerage firm acknowledges that ONDC has the potential to pose a threat to Zomato, but only if it scales up meaningfully across categories and achieves greater efficiency than the “walled gardens.”

“The current 10,000 deliveries per day – 40 percent of this in Bangalore alone – across categories does not present enough scale to absorb the delivery rider cost for the platform. For comparison, Zomato delivers 1.8 million orders a day on a standalone basis. However, the industry-wide figure across multiple categories (relevant for ONDC) would be several times greater than this,” Motilal Oswal said in a report.

It appears that the free delivery option for ONDC apps is limited to the first order, and any subsequent discounted or free deliveries are expected to be borne by the restaurant. This could be an attempt to gain a competitive advantage over the incumbent Zomato and Swiggy duopoly, but it may not be a sustainable business model, the report said.

Additionally, after the first free delivery, in some cases, the delivery charges on ONDC may be higher than those of Zomato’s or Swiggy’s. Moreover, the difference in pricing may not be sufficient to overcome the advantages of the wider selection of food options and a well-established delivery infrastructure of the incumbents, who have an early mover advantage, it pointed out.

The brokerage house says the food delivery business is still at a nascent stage in India with a long runway of growth. “With dominant market share and strong growth in the food delivery business and Hyperpure, we expect Zomato to report a strong 29 percent CAGR over FY23-25. While the management expects to turn profitable latest by 2QFY24, we believe the company should be breakeven in FY25. We view the acquisition of Blinkit as an additional risk and high attrition at senior management level remains a concern,” Motilal Oswal said.

The brokerage house has reiterated the ‘buy’ rating on Zomato and a target price of Rs 70 a share, implying a 15 percent potential upside from current market price.

Recent media reports have highlighted a rise in the number of orders being placed through ONDC and the potential benefits this could have for restaurants. This is because the take rates offered by ONDC are said to be different from those of the Zomato or Swiggy duopoly, which could potentially be more advantageous for restaurants.

Motilal has cautioned that if ONDC continues to scale up over time, it could pose a significant risk to the Zomato and Swiggy duopoly. As ONDC expands and achieves greater delivery efficiency, it could become a sustainable system that threatens the market dominance of the incumbents. Therefore, it will be important to closely monitor ONDC’s growth and development in the coming months and years.