Zomato sees a series of resignations. How worried should investors be?

Euphoria over food delivery platform Zomato’s strong financial performance in the quarter ended September has been clouded by a string of high-level exits this month.

On Friday, the company informed stock exchanges that co-founder Mohit Gupta had quit after four-and-a-half years of association with it.

He was CEO of the food delivery business before his elevation in 2020 and continued to lead the unit.

Gupta’s exit was the third high-profile departure this month from Zomato after that of Rahul Ganjoo, Head of New Initiatives, and Siddharth Jhawar, Head of Intercity Legends, a unit devoted to home delivery of food in one city from any other city.

In August, Nitin Savara, Deputy Chief Financial Officer, resigned to start something new.

Zomato did not indicate in its disclosure that it was looking for a replacement, and people aware of the development said the business will likely be led by Deepinder Goyal, founder and chief executive officer.

At around 11:30 am on Monday, November 21, shares of Zomato were trading at Rs.64.40, 4.2 percent down from their Friday close on the NSE, while the benchmark Nifty had dropped 0.7 percent to 18,183.35 points.

The stock has risen some 13 percent in the last six months, but is down around 54 percent year to date.

The stock markets do not like disruptions and senior management exits are seen as a negative for any company. It is especially troubling if such exits come in succession, usually a sign of trouble brewing in management.

In the case of Zomato, it is likely a coincidence rather than a sign of trouble in management, analysts said.

“While we are unsure of the potential impact of Mohit's departure on the business, in our interactions, we find Deepinder in control of the business and hence do not see a big disruption or a major change in strategy,” said Vivek Maheshwari, equity analyst at Jefferies.

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“The resignations by Rahul and Siddharth may also not have any material impact and again, it does not appear that the company is looking for a replacement,” Maheswari said.

Better disclosure practices

The recent appreciation in the share price of Zomato was on account of signs that its management was focussing on profitability rather than growth.

The company also won favourable reviews for better disclosure practices during the quarterly earnings update.

Also Read: The biggest positive in Zomato Q2 is not in numbers, but in attitude

Coincidentally, none of the people who resigned from Zomato were key managerial personnel (KMP) and the disclosures were made voluntarily. As per the law, companies are mandated to disclose exits of KMPs only.

Clearly, the company has learned its lesson from the resignation last year of Gaurav Gupta, co-founder who headed the supply vertical, that led to criticism.

Growth vs profits

Some of the recent resignations may not be a big headache for the company as they were getting redundant to an extent after the management said it will be focussing mainly on three businesses: Deepinder Goyal directly leading food delivery and overseeing ther other two businesses; Albinder Dhindsa heading Blinkit; and, Hyperpure under Rakesh Ranjan.

Zomato has also shut down a number of foreign subsidiaries in recent months that were not generating any revenue for the firm. It also said it will go slow on new initiatives now.

“While we remain buyers, we expect the stock to get a clue from the December quarter results as the company walks a tightrope of growth vs margins,” said Maheshwari. “Management reiterated guidance of breakeven by September 2023 recently, but investors also expect no compromise on growth -- hence, the stock may now be range-bound in coming months.”

Jefferies has a target of Rs 100 on Zomato. Morgan Stanley is ‘overweight’ with a target at Rs 80. ICICI Securities rates the stock ‘hold’ with a target price of Rs 65.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.