It was July 2021. I was sitting on a cozy couch ordering my favourite burger from Burger King.
Up popped a notification saying Zomato shares make a blockbuster debut, surging over 60% on the first day.
There was a time when Zomato's market value was more than Tata Motors, Coal India, and Vedanta. All these are Nifty 50 stocks, the elite club of 50 bluest of bluechips. It had a marketcap more than 1 lakh crore. This to a company reeling under intense financial pressure.
With a history of net losses for 2018 through 2021, but with strong revenues to boast od, began the journey of the food delivery platform.
Ten months later, the company is facing a dilemma and has serious questions to answer. It has eroded more than half of its marketcap since listing.
For investors in Zomato, the company is delivering sweets to your home but has failed to provide sweet gains to your portfolio.
Yesterday, the company gave another blow to shareholders by posting Rs 3.6 bn in quarterly losses, up over 300% on a YoY basis.
For the full year too, losses rose from Rs 8.2 bn in fiscal 2021 to Rs 12.2 bn this year.
It's at times like these when I'm reminded of Aswath Damodaran's valuation rationale and whether he was right after all.
When it comes to valuations, it's hard to not mention Professor Aswath Damodaran, a foremost authority on valuations.
Damodaran is a disciple of intrinsic value investing. He is currently a professor of finance at NYU's Stern School of Business.
Damodaran is widely respected as one of the foremost experts on corporate valuation. He has published several books on equity valuation and corporate finance.
As soon as shares of Zomato listed on the bourses, the valuation guru wrote in his blog that Zomato's true value should be just Rs 41 per share.
That's right.
The true value of Rs 41 per share was at a sharp discount of 70% from Zomato's share price of Rs 138 back in July 2021.
This was not an out of the box or any random figure which Damodaran arrived at. It was based on calculations and valuation math.
Damodaran analysed the online food delivery market in India and arrived at a valuation of US$ 40 bn in 10 years. From this US$ 40 bn market, Zomato is expected to get 40% market share.
Here's an excerpt:
It was not just Damodaran who justified his concerns about Zomato's market value.
I mean how can a loss-making company with revenues less than Rs 20 bn have a marketcap more than Indian Hotels and Jubilant Foodworks? These companies have bright prospects.
Big bull Rakesh Jhunjhunwala has not shied away from making ferocious statements against the food delivery platform company.
Jhunjhunwala has said his concerns around new-age tech companies stem from valuations and not from their business models.
And there's more...
In an interview with The Economic Times, Shankar Sharma also expressed his concern:
When Zomato came out with its IPO, our editors at Equitymaster also expressed concerns.
Here's what Aditya Vora, analyst at Hidden Treasure had to say about the Zomato and other 'platform' businesses...
Read the full article here - Zomato: Worth a Bite?
Aditya went a step further and explained why you shouldn't buy Zomato even after its crash. Here's him:
Read the entire piece here: Why You Should Not Buy Stocks Like Zomato in this Market Crash.
Meanwhile, Richa, our smallcap expert, believes you don't need to invest in Zomato to play the food delivery megatrend.
She says there is a better and unique backdoor way...
So, was the valuation guru right in his valuation techniques after all?
It was a bold statement to make at that time. When the markets seemed to be in a bull run and there was not stopping these stocks.
But was Aswath Damodaran right in valuing Zomato at just Rs 41 per share?
Rs 41 seems like a big understatement, given its name rhymes with Tomato, which is available between Rs 50-55 per kg. That started the phrase - Zomato at the price of a Tomato. Earlier this month, Zomato's stock price officially traded lower than 1 kg of Tomato, from which its name was derived.
It appears Damodaran's price was justified after all as shares of Zomato nearly came to the levels he suggested.
Have a look at the chart below which will show you the journey of Zomato since listing.
Investors in Zomato have sighed a relief today as Mr. Market has rewarded the stock with 18% gains. All this despite raking in huge losses.
In intraday trade today, Zomato rose over 19% to Rs 67.6, its biggest rally since listing. Once again, Zomato's market value is back above Rs 500 bn.
Today's rally could be due to various reasons including brokerages posting positive views and raising their target prices.
Another reason could be the company's management commentary, where investors are expecting Zomato to lay out big growth plans.
An analysts' call is scheduled today at 5:30 PM.
In its Q4 results, Zomato's revenue surged sequentially as new customers propelled a surge in order volumes.
During the quarter, Zomato's gross order value (the total value of all food delivery orders placed on the platform) surged a massive 77% to a record high, while average monthly transacting customers were also at an all-time high of 15.7 m.
Here's Deepinder Goyal, Zomato's CEO, soothing investors:
Zomato is now present in 1,000+ towns and cities across India, with more than 300 city additions during the quarter under review.
Another positive for the food delivery company is the recent cut in taxes on fuel prices. In an exchange filing, the company expressed concerns that elevated fuel prices were weighing on the contribution margin as it is not fully passed on to customers.
The tax cut is good news for Zomato as it will reduce its delivery costs.
Investors are now waiting with bated breath about what the company has to say in its first earnings call.
Zomato has a sizeable market share with top two players (Zomato and Swiggy) dominating the segment.
Though Amazon and others have planned to enter this space, it will take some time before they reach the higher level and compete with Zomato and Swiggy.
Another growth prospect for Zomato is it operates in a largely untapped market.
While this may sound appealing, remember that Zomato is still a loss-making company. It has been posting cumulative losses for the last five years.
That's the problem with new age tech companies. They may have a very bright future where big profits await them. But now, they are burning a lot of cash.
Happy Investing!
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...
Yash Vora is a financial writer with the Microcap Millionaires team at Equitymaster. He has followed the stock markets right from his early college days. So, Yash has a keen eye for the big market movers. His clear and crisp writeups offer sharp insights on market moving stocks, fund flows, economic data and IPOs. When not looking at stocks, Yash loves a game of table tennis or chess.
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