This was especially true given that the bumper IPO of the Indian food ordering app which started out at a large premium to its offer price of Rs 76 and eventually hit a high of Rs 169 on BSE in November last year.
Zomato’s stock has pummelled in the past few months amid a global tech rout in the public markets.
The company’s shares ended the day at Rs 43.95 on Wednesday, having lost more than three-fourths of its worth.
In a Twitter post, Damodaran said that in hindsight, he was both wrong and right about Zomato. Also, in a
blog post, Damodaran did a quick review of his 2021 valuation.
Just over a year ago, I valued Zomato, the Indian food-delivery company, at ₹41/share, ahead of its IPO, and argued… https://t.co/OTytdHuydg
— Aswath Damodaran (@AswathDamodaran) 1658954880000
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“Though some have suggested that price dropping to my value is vindication of my valuation, I am not part of that group for three reasons. First, it seems skewed to celebrate only your successes and not your failures, and it behooves me to let you know that I also valued at close to ₹2000 per share, and the stock is currently trading at Rs 713. Second, even if nothing in my valuation has changed, the value per share of Rs 41 per share was as of July 2021, and if it is a fair assessment, the expected intrinsic value per share in July 2022 should be roughly 11.5% higher (i.e., grow at the cost of equity), yielding about Rs 46 in July 2022. Finally, the company and the market have changed in the year since I last valued it, and to make a fair judgment today, the company will have to be revalued,” he wrote in the blog.
In his review, Damodaran said that since his valuation, there have been four quarterly reports from the company, in addition to news stories about governance and the company’s legal challenges, and there is a mix of good and bad news in them.
“The food delivery market in India has continued to grow over the last year, and Zomato has been able to maintain its market share. In fact, there are signs that the market is consolidating with Zomato and Swiggy controlling 90% of the market share of restaurant deliveries. As a consequence, Zomato’s gross order value and revenues have both jumped over the course of the last year,” he wrote.
However, he pointed out that over the previous year, the take rate, or the portion of gross order value that Zomato keeps, had significantly decreased. He added, “This reflects increased market competition, higher delivery costs, and Zomato’s entry into newer markets (like grocery delivery) with lower revenue sharing.”
To push ahead its expansion plan, Zomato has kept up a policy of purchasing smaller companies.
Although many of these purchases have been modest in size, Damodaran pointed out that the most recent one, Blinkit, has prompted concerns about whether this growth is occurring at a sustainable cost.
“Even if the Blinkit acquisition pans out, it is an open question whether Zomato can continue to deliver growth effectively and efficiently through this acquisition-driven strategy, using its own shares as currency, especially as it scales up,” he said.
He claimed that, despite a lesser revenue share and a smaller market share, the Blinkit acquisition shows that Zomato is contemplating a significant entry into the grocery delivery business (increasing the total market size both now and in the future).
“The value per share has dropped from ₹40.79 to ₹35.32 per share, with much of the value change from last year is coming from macroeconomic developments, manifested in a higher cost of capital. For this value to be generated, the company will need to stop paying lip service to contribution margins and adjusted EBITDA, and work on reducing growth in its cost of goods sold,” he noted.
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“Allowing for the wide ranges of estimates that you can have on the total market for food (restaurant and grocery) delivery in India in 2032 and the uncertainties about Zomato’s share of that market and its operating margins, you get a range of values. The median value of ₹34.12 is close to the base case value of ₹35.32, not surprising since the input distributions were centered on my base case input values, and at its current stock price (₹41.65 on July 26), the stock is still at the 70th percentile, he said.
If the price falls below his median value for a few more weeks like the last two, according to Damodaran, “I would buy Zomato as part of a diversified portfolio (and not as a stand alone investment).”
