I don't see Zomato's value dramatically shifting from Rs 35 per share: Aswath Damodaran

The dean of valuation on why he doesn't see the food delivery company's fair value materially change and how 'numbers' flow from the 'story' in investing

By Neha Bothra Forbes India Staff

Published: Sep 22, 2023 10:46:22 AM IST

Updated: Sep 22, 2023 11:02:36 AM IST

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Aswath Damodaran, professor of finance, NYU Stern School of Business Image: Alexander Tamargo/Getty Images for Vox Media

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:

Zomato: ‘I don't think the facts on the ground have changed much’

I haven't revisited the valuation. I think they've done some things better, some things worse, but I think the price is going to go up and down till you get to some steady state here. It remains predominantly a restaurant food delivery business. I don't think the facts on the ground have changed that much. If there's a tilt in the value, it's got to come from risk premiums changing, maybe a higher base number. I don't see the value dramatically shifting, even though I haven't done the full-fledged valuation, because I don't see a shift in the story.

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.

Also read: VCs are traders. They are not investors: Aswath Damodaran

Value of narratives: ‘Your numbers convey a story’

So, if we go back and look at my Zomato valuation, you can agree with it or disagree with it. It's not about what I'm using as revenue growth and margins that's giving me the value. It's my story of Zomato as a restaurant food delivery business that's going to feed off the growth of that business in an immense market like India. That's the story that's driving it. Now you could tell a different story about Zomato. You might say, look, it's not a restaurant food delivery business, it is a grocery delivery business in addition. That changes the story, it changes your inputs. Will it make the value higher? Maybe it will, maybe it will not, but it's a different story. I tell people, look, when you build a spreadsheet, think about the underlying story you're telling, because even if you say I have no story, your numbers convey a story and you've got to believe in that story.

New-age companies: ‘Only a few will become legendary investments’

For young companies to make it, lots of pieces have to fall into place. So, when people accuse me, when I valued Zomato, of being too pessimistic, what I think they're missing is how many things have to work out for a young company to become a large successful company. I mean, I was awfully wrong on Paytm. And you can see what happens when you tell a story, and the management is incapable of delivering on that story, what can happen to your value. Only a few of these companies will come out of the other end as superstars, these 10 baggers or 100 baggers that become legendary investments.

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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.”

Also read: There is no day that I wake up and say, 'I wish I didn't have to teach today': Aswath Damodaran

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.”