zomato: Changing the market matrix: Aswath Damodaran revalues ​​Zomato at Rs 35. Read his justification

Rating Guru Aswath Damodaran has a new fair value for Zomato, suggesting more suffering for the new age title. A little over a year after Damodaran set the value of Rs 41 on July 21, 2021, he now sees the stock at Rs 35.32.
Taking into account the wide ranges of estimates that can be had on the total food delivery market (restaurants and grocery) in India in 2032 and the uncertainties about Zomato’s share in that market and its operating margins, a range of values ​​is obtained.

“The median value of Rs 34.12 is close to the base case value of Rs 35.32, unsurprising since the input distributions were centered on my base case input values ​​and its current stock price, the stock is still in the 70th percentile. That said, a few more weeks like the last two will push the price below my median and, if so, I would buy Zomato, as part of a diversified portfolio, ”Damodaran said.

Damodaran said he received pushbacks from those who disagreed with his assessment, with half saying they were too optimistic about the future and the other half saying I was ignoring the growth potential overseas and in. new activities.

Now, a year after his Zomato valuation blog post, Damodaran said that while some have suggested that the price falling to its value is a vindication of valuation, Damodaran said he is not part of that group for three reasons. .

In the first place, it seems skewed to celebrate only your successes and not your failures, and he should let everyone know that he too appreciated.

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

“Second, even though nothing in my valuation has changed, the value per share of Rs 41 per share was as of July 2021 and, if this is a fair valuation, the expected intrinsic value per share as of July 2022 should be around. 11.5% higher (ie, grow at the cost of equity), producing about 46 rupees in July 2022, “he said.

Finally, Damodaran said, the company and the market changed in the year it last evaluated it and, to make a fair judgment, the company will need to be re-evaluated.

Damodaran said that since his review of the IPO valuation, there have been four quarterly reports from the company, as well as news about the company’s governance and legal challenges, and there’s a mix of good and bad news in them.

On the good news front, India’s food delivery market has continued to grow over the past year and Zomato has managed 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 result, Zomato’s gross order value and revenue have both increased over the past year, he said.

Additionally, the substantial cash that Zomato raised during its IPO is providing it with a cushion of cash and cash flow, with cash and short-term investments jumping 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 likelihood of failure acts as a brake on value, this will benefit the company as it not only provides a cushion for the company, but also eliminates dependence on the company. external capital for the next few years, “Damodaran said.

On the bad news front, Damodaran said, the purchase rate, which is the slice of gross order value (GOV) that Zomato holds, has dropped substantially over the past year, reflecting increased competition in the market, plus delivery costs. and Zomato’s entry into new markets (such as grocery delivery) with lower revenue sharing.

“Furthermore, growth has been staggering and given Zomato’s active acquisition strategy, it’s unclear how much of the revenue growth is organic and how much is acquired. Not surprisingly, the company’s losses have increased over the past year.” said the value investor.

Damodaran said some investors bought Zomato stock in their glory days in 2021 and are either holding on, hoping for a return, or have sold and are licking their wounds.

“I’m sorry for your loss, but please don’t attribute to conspiracies (in which insiders, founders and supporters play the role of villains) that can best be explained by greed and its ability to cloud judgment. No matter how bad you are. It is tempting to blame the financial news, reporters, equity research analysts and others for your decision to buy Zomato at its peak, that decision was ultimately yours and the first step to becoming a good investor is to take responsibility for your own. decisions, “he said.

Put simply, Damodaran said, if you live on momentum, you die for it.

“Your consolation prize is that you have many companies in this market (from Cathie Wood at Ark to the thousands of investors who invest their money in Bitcoin, NFT and other cryptocurrencies), and that too will pass,” he said.


(Disclaimer: The recommendations, suggestions, views and opinions provided by the experts are their own. These do not represent the views of Economic Times)

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