Valuation guru Aswath Damodaran believes the shares of the company are not worth more than Rs 41 a piece–a sharp discount of about 70 per cent from the last traded price of Rs 138 per share on BSE. It is also nearly half of the issue price of Rs 76 per share. Damodaran has taken into account the total food delivery market and Zomato’s share in it, revenue share, profitability, reinvestment and risk for the companies to reach at this valuation.
The stock immediately entered the coveted club of companies that are valued at more than Rs 1 lakh crore. It is now bigger than IndianOil, Bharat Petroleum, Tata Motors, IndusInd Bank, Coal India andVedantaNSE 1.01 % –many of which are part of Nifty 50 index.
However, Valuation Guru Aswath Damodaran believes the shares of the company are not worth more than Rs 41 apiece — a sharp discount of about 70 per cent from the last traded price of Rs 138 per share on BSE. It is also nearly half of the issue price of Rs 76 per share.
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“With my upbeat story of growth and profitability, the value that I derive for equity is close to Rs 39,400 crore (about $5.25 billion). That may seem like a lot to pay for a money-losing company with less than Rs 2,000 crore in revenues in the most recent year, but promise and potential have value, especially when you have a leader in a market of immense size. That said, the stock’s pricing (Rs 72-75 per share) makes it too expensive,” Damodaran said in his blog Musing on Markets.
Source: Ashwath Damodaran
The IPO issue price should not be surprising since value investors across the world unanimously agree that shares sold during IPOs are always overpriced. However, the kind of valuation the market is offering to the stock shows how much liquidity is there in the market.
Damodaran, Professor of Finance at the Stern School of Business at New York University, has taken into account the total food delivery market and Zomato’s share in it, revenue share, profitability, reinvestment and risk for the companies to reach at this valuation.
He has assumed the food delivery market in India to reach up to $40 billion and Zomato’s market share to hit 40 per cent in the next five years and operating margin of 30 per cent for his calculation.
Damodaran’s thoughts have been echoed by many Indian value investors too.
Ramdeo Agrawal and Rakesh Jhunjhunwala, two of the most successful investors on Dalal Street, have publicly ridiculed the pricing of the company. Many others have also wondered how a loss-making company can be valued at more than the likes ofJubilant FoodWorksNSE 3.60 %, Indian Hotels and others that have a history of delivering growth and profits to their shareholders.
But the promise of Zomato is in the fact that it operates in a domain where there is ample growth opportunity and minimal competition, a fact Damodaran also took note of.
But there are multiple risks as well.
“I believe the company is currently overpriced, given its potential. But I would have no qualms about investing in the stock, if the price drops in the near future, with the full understanding that this is a joint wager on a company, a sector and a country,” Damodaran said.