Zomato Stock: Changing Market Matrix: Ashwath Damodaran revalues ​​Zomato at Rs 35. read his argument

Valuation guru Ashwath Damodaran has a new fair value for Zomato, which suggests more pain for the new-age stock. Exactly a year after Damodaran was valued at Rs 41 on July 21, 2021, he now sees the stock at Rs 35.32.

Given the wide range of projections for the total market for food (restaurant and grocery) delivery in India in 2032 and the uncertainties about Zomato’s share in that market and its operating margins, one finds a range of values.

“The average price of Rs 34.12 is close to the base case value of Rs 35.32, not surprising as the input distributions were centered on my base case input value, and at its current stock price, the stock is still at the 70th percentile. That’s it. That said, a few more weeks like the last two weeks will push the price below my average price, and if that happens, I will buy Zomato as part of a diversified portfolio,” Damodaran said.

Damodaran said he received backlash from those who disagreed with his assessment, half argued that he was too optimistic about the future and the other half said I was looking forward to the potential for growth overseas and in new businesses. was ignoring.

Now, a year after his Zomato valuation blogpost, Damodaran said that while some have suggested that his price drop is evidence of valuations, Damodaran said he is not part of that group for three reasons.

At first, it seems slanting to celebrate only your successes, not your failures, and it behooves him to let everyone know that he’s valuable too.

2,000 per share, and the stock is currently trading at Rs 713.

“Second, even though nothing has changed in my valuation, the value per share was Rs 41 per share as of July 2021, and if that is a fair valuation, the expected intrinsic value per share in July 2022 should be around 11.5 per cent. Higher (i.e. growth at cost of equity), yielding around Rs 46 in July 2022,” he said.

Ultimately, Damodaran said, the company and the market have changed over the years since they last evaluated it, and in order to make an unbiased decision, the company will have to be reevaluated.

Damodaran said since his review of the IPO valuation, there have been four quarterly reports from the company, apart from news about governance and the company’s legal challenges, and they contain a mix of good and bad news.

On the good news front, the food delivery market in India has been growing steadily 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 per cent market share of restaurant delivery. As a result, both Zomato’s gross order value and revenue have jumped during the last year, he said.

Moreover, the substantial cash that Zomato has raised on its IPO is providing it with a cash and liquidity cushion, with cash and short-term investments increasing from Rs 15,000 in March 2021 to Rs 68,746 (including short-term investments) in March 2022.

“Since Zomato is a young, money-losing company, and the possibility of failure acts as a drag on the price, it will benefit the company, as it not only provides a cushion for the firm but also external It also eliminates dependence on capital for a few years,” Damodaran said.

On the bad news front, Damodaran said, the piece of Gross Order Value (GOV) placed by Zomato has come down significantly as compared to last year, reflecting the increasing competition in the market, higher delivery cost and Zomato’s entry. Markets (like grocery delivery) with less revenue sharing.

“Furthermore, growth is fit and started, and given Zomato’s proactive acquisition strategy, it is unclear how organic the revenue growth is and how much has been acquired. Not surprisingly, the company’s losses last year ,” said the value investor.

Damodaran said some investors had bought Zomato shares in its glory days in 2021 and are either expecting a comeback, or are selling, and licking their wounds.

“I’m sorry for your loss, but please don’t give credit for conspiracies (where insiders, founders, and supporters play villains), which can be better explained by greed, and cloud judgment ability. Regardless of whether you No matter how tempting financial news, journalists, equity research analysts and others are to blame your decision to buy Zomato at its heights, that decision was ultimately yours and the first step in becoming a good investor is ownership of your decisions. Have to take it,” he said.

Simply put, as Damodaran said, if you live by speed, you die by it.

“Your consolation prize is that you have a lot of companies in this market (from Kathy Wood to Ark to thousands of investors who have put their money in bitcoin, NFTs and other crypto), and this too shall pass,” he said.


(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. They do not represent the views of The Economic Times)

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