Zomato Shares Dip 2% on ₹400-Crore GST Notice Impact

Zomato and Swiggy, India's prominent food delivery platforms, are in the spotlight as they face tax challenges. The Directorate General of GST Intelligence (DGGI) has issued GST demand notices, alleging non-payment of GST on delivery fees for the period between July 2017 and March 2023. This development has impacted Zomato’s stock prices and raised questions about the taxation dynamics in the industry. Both Zomato and Swiggy are yet to formally respond to the notices. However, as per the reports both platforms are likely to contest the claims.

Market Response

On November 22, Zomato shares closed in the red at ₹116.50 and opened flat on November 23. The stock, currently trading at ₹113.40, witnessed a 1.69% decline. The DGGI's notice claims Zomato owes over ₹400 crore, while Swiggy is facing a demand of around ₹350 crore. The disagreement stems from whether the platforms or gig workers should be responsible for paying the 18% GST on delivery fees.

Jefferies' Perspective

Despite these challenges, Jefferies, in its Equity Strategy report, maintains a 'Buy' recommendation for Zomato with a target of ₹165. The foreign brokerage acknowledges Zomato's positive turn in profit in Q2FY24 and foresees continued growth in both food delivery and quick commerce.

Jefferies highlights the untapped potential in the Indian food services industry, particularly online food delivery, poised for a 20% Compound Annual Growth Rate (CAGR) in the next decade. Quick commerce, a $50 billion opportunity, is also growing over 30% CAGR.

Zomato, holding a 55% market share, reported a net profit of ₹36 crore in Q2FY24, compared to a net loss of ₹251 crore in the same period last year. The revenue from operations soared to ₹2,848 crore, from ₹1,661 crore in the same period a year ago, reflecting a 72% growth 

Stock Performance

Over the past month, Zomato's stock increased 4%, even considering today's slight dip. Looking at a broader timeframe, the stock rose 79% over the past six months and delivered an 83% return to investors in the last year. However, when we extend our analysis to the time since its listing until now, Zomato's stock has seen a decline of 10% from its all-time high of around ₹153.

Final words

Despite the current GST challenges, Zomato's financial resilience, positive market indicators, and promising outlook for the industry signal enduring strength. The unfolding situation will be closely monitored by investors and stakeholders as Zomato navigates both regulatory hurdles and market dynamics.