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Zomato shares were under pressure on Tuesday as investors turned cautious after the Competition Commission of India (CCI) ordered a probe against the food delivery platform and its peer Swiggy over alleged unfair business practices.

Following yesterday’s development, Zomato stock plunged 4.6 percent in early deals. The shares were trading 2.7 percent lower at Rs 83.80 on the Bombay Stock Exchange (BSE) and were down 2.6 percent to Rs 83.95 on the National Stock Exchange (NSE) at 9:40 am.

Though Zomato shares have gained more than 5 percent in the past five days, in 2022 (year-to-date) the stock has erased more than 40 percent of investors’ wealth as against the benchmark Sensex which has gone up nearly 2 percent. This, as investors continue to remain apprehensive about new age stocks. The food delivery company made its Dalal Street debut on July 23, 2021.

Tuesday’s downtrend comes CCI has ordered a detailed investigation against food delivery platforms Zomato and Swiggy for alleged unfair business practices with respect to their dealings with restaurant partners. The order came following a complaint filed by the National Restaurant Association of India (NRAI).

The watchdog's probe arm - Director General (DG) - will investigate the case. The regulator said that "prima facie there exists a conflict of interest situation, warranting a detailed scrutiny into its impact on the overall competition between the RPs vis--vis the private brands/entities which the platforms may be incentivised to favour". CCI has given the DG 60 days’ time to submit the probe report.

Zomato has issued a statement saying it will work closely with CCI with its investigation. "All of our practices are in compliance with competition laws," it added.

Karan Taurani, Senior Vice President and Research Analyst at Elara Securities told flagged concerns about the food delivery app’s growth rate as the restaurants it is associated with are struggling with order volumes.

“Before the pandemic, there were discounts that were given by the aggregator platforms and in terms of losses, these discounts were shared by the restaurant and the aggregators. Since the pandemic began, the entire losses were passed on to the restaurant partner. If you look at some of the small cloud kitchen operators, the standalone restaurants, they are struggling and all their order volumes were propelled by discounts because once you have discounts there is a customer willingness to try out food from these kinds of restaurants,” he explained.

But, since the discounts have come down, restaurants are now struggling in terms of volume and that has a huge impact, Taurani added.

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“We anyway believe that at the time of the IPO last year, when the stock got listed, there was a very low likelihood of taking rates going higher from hereon because globally the take rates are in the range of 5-15 percent whereas, for something like Zomato, the take rate is about 17-18 percent already. And for new operators or standalone restaurants or cloud operators, it can even go as high as 27-28 percent. So, definitely, there are clear signals in terms of concerns around the growth rate for Zomato,” he told CNBC-TV18.

(Take rate is the fees and commissions that e-commerce players or quick service delivery platforms collect on sales by third-party sellers)

Meanwhile, Prashanth Tapse, Vice President (Research), Mehta Equities Ltd, suggest conservative investors avoid holding or investing in case of such “unfair business practices” He added that present valuations of new-age firms are still stretched to his firm’s expectation. According to him, Zomato or Swiggy would need to change strategies to match market trends and grow faster and given the tug-of-war competition, they intend to get into some unfair business practices and land in trouble.

Also Read | Young Turks: Zomato launches 10-minute food delivery; experts weigh in

“Considering these risk factors, I would be more comfortable to look into Zomato if it’s available anywhere between Rs 45-50/- and then take a calculated risk. At this juncture, accumulated losses would remain a concern and it only requires more capital to keep the business going,” Tapse told CNBCTV18.com.

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(Edited by : Kanishka Sarkar)

First Published:Apr 5, 2022 11:02 AM IST