After sinking close to 60 percent since listing, over the past three months, Zomato’s stock price has been going up, and it hit a 52-week high of Rs 105 per share on Monday. The food delivery company reported a first-ever net profit in 15-years of Rs 2 crore in the previous quarter. In the last few months, several global brokerages have revised their rating to ‘buy’ and ‘outperform’. Some analysts, to explain the renewed confidence, point out that Zomato has a long runway for customer acquisition and revenue growth.
But how has the narrative shifted? And does it materially alter the value of the business?
Valuation guru Aswath Damodaran valued Zomato at Rs 35 apiece in July 2022 and he doesn’t see the value dramatically shifting. To explain why, in part-3 of a multi-part series, Damodaran, professor of finance, NYU Stern School of Business, underlines the importance of blending stories with numbers when valuing a company. Edited excerpts from the interview on Forbes India Pathbreakers in August:
And that"s, I think, the key. Unless the story shifts, your value is not going to change dramatically. What could cause my story to shift? Well, if Zomato shows evidence that it can actually make money on grocery deliveries, that"s a huge business. Then I"d be inclined to go back and revisit my story and valuation. I"m not stuck on my story and valuation. One of the biggest dangers in investing is falling in love with your own story for a company. In which case, you refuse to look at the data because the data might contradict your story.
***For context, in July 2021, Damodaran had valued Zomato at Rs 41 apiece. “Zomato"s business model is neither innovative, nor groundbreaking, resembling other online food delivery companies in other parts of the world. The allure to investors comes from Zomato"s core market in India, and the potential for growth in that market," he wrote on his personal blog. “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."
A day later, the food delivery platform listed close to 50 percent above its price band of Rs 72 to Rs 76 at Rs 115 per share. But within six months, it shed its listing gains. A year later, in July 2022, it sunk to around Rs 41 per share and traded below its IPO price for most of last year. In fact, Damodaran, in July 2022, based on a revised evaluation, slashed the company’s value per share to Rs 35.
“The value per share has dropped from Rs 40.79 to Rs 35.32 per share, with much of the value change from last year 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 Ebidta, and work on reducing growth in its cost of goods sold," Damodaran said on his blog in July last year. “The mood and momentum that worked in its favour for most of 2021 had turned against the company… In 2022, though, the company"s stock rediscovered the laws of gravity, and news stories that would have elicited positive responses in 2021 are having the opposite effect. The most recent plunge in the stock price seems to have been precipitated by Zomato’s acquisition of Blinkit, a grocery delivery company, for Rs 4,400 crore and the expiration of the lock-in period."