Zomato’s stock marketplace debut has ushered in a new era for Dalal Street with new-age technologies unicorns on give for domestic investors even so, worth investors are not vying for this piece of the cake. Aswath Damodaran, one of the world’s leading valuation gurus, values Zomato at just Rs 41 per share — drastically much less than each IPO value as nicely as listing value. Aswath Damodaran, Professor of Finance at Stern School of Business, NYU, believes the stock is also highly-priced, contemplating the loss-producing entity it is suitable now.
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Zomato share value soared to hit the upper circuit of Rs 138 shortly soon after listing on Friday, more than 82% from the IPO value, assisting investors pocket important listing gains. The debut rally helped Zomato stock attain a marketplace capitalization of more than Rs 1 lakh crore, leaving behind businesses such as Tata Motors, Vedanta, Indian Oil, and Mahindra & Mahindra — all profit-producing businesses. On the other hand, Zomato is nonetheless a loss-producing entity relying on investors to maintain the wheels operating. Earlier last week, significant bull Rakesh Jhunjhunwala had also expressed issues about Zomato, saying that he would rather invest in currently established organizations.
Investors ill-informed? Not necessarily
Aswath Damodaran refrained from summarily dismissing Zomato IPO investors’ judgement. “I think it is hubris to dismiss those who invested in Zomato at Rs 72 per share or higher, as speculators or ill-informed, since there are plausible stories that get you to values higher than Rs 100 per share,” Aswath Damodaran wrote in his weblog. “That said, given my story and valuation for the company, I think that at a Rs 70-75 per share price, the stock looks overvalued to me,” he added.
Aswath Damodaran argues that Zomato’s small business model is neither revolutionary nor ground-breaking but resembles other such platforms across the world. “The allure to investors comes from Zomato’s core market in India, and the potential for growth in that market,” he stated. Food delivery service penetration in India is low when compared to markets such as the United States and drastically low when compared to China. “The Zomato story, or at least the upbeat version of it, is that the Indian food delivery/restaurant market will grow, as Indians become more prosperous and have increased online access,” he added.
Valuation math
The NYU professor, breaking down his valuation math, stated that the total on the internet meals delivery marketplace in India could attain $40 billion in 10 years. Zomato is anticipated to get a 40% share of this, in the 3-player marketplace then. Currently, India’s meals delivery marketplace is dominated by two players, but Jeff Bezos’ Amazon is producing a foray into the marketplace.
“With my upbeat story of growth and profitability, the value that I derive for equity is close to Rs 394 billion [or, Rs 39,400 crore], translating into a value per share of Rs 41. That may seem like a lot to pay for a money-losing company with less than Rs 20 billion 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, notwithstanding my story,” Aswath Damodaran stated.
Although Aswath Damodaran believes the income-losing and money-burning Zomato is presently overpriced, he added that offered its possible, he would have no qualms about investing in the stock, if the value drops in the close to future.