Valuation game: Zomato at no. 2
Ant Group-backed Zomato’s listing-day valuation, with a market cap of ~98,849 crore, has emerged the highest after Coal India’s 11 years ago. Coal India, which made its stock market debut in October 2010 after a record ~15,200-crore initial public offering (IPO), had a market cap of ~2.16 trillion following its trading debut, which saw its shares soar 40 per cent.
DLF and Reliance Power had a market cap of ~96,246 crore and ~89,233 crore at the end of listing-day trade.
Valuation at the IPO price for Coal India, DLF, and Reliance Power was much higher than the ~60,000 crore sought by the online food delivery company.
On the first day, Zomato broke into the club of top 50 listed companies in terms of market capitalisation. The fast-growing start-up is now valued more than Tata Motors, Mahindra & Mahindra, and Britannia. Interestingly, investors have ascribed a near ~1-trillion valuation despite the company not being able to generate a single rupee in profit.
Market watchers say large investors are willing to overlook metrics such as earnings and market-to-sales, given Zomato’s growth potential and the low penetration of online food delivery in the country.
In a note ICICI Securities has highlighted the near-term valuations for tech companies are often optically high and misleading. It cites examples of Twitter and Facebook, which traded at 90 times and 30 times their sales at IPO valuations, or Zoom and Google, which traded at 2,000 times and over 200 times their price-to-earnings at their issue price.
“‘Near-term’ losses/cash burn are the key reasons for the pessimism of investors around these IPOS. This is largely due to spending targeted at driving customer adoption and branding. Notably, these front-ended investments should create strong moats and drive back-ended benefits in the form of brand recall and network effect for several years to come,” said the note by ICICI Securities.
“Profitability and cash flow are great sanity metrics, they are better applied on businesses in steady state such as Infosys, Google, Hindustan Unilever.”
Zomato is the market leader in the domestic food delivery market, and it is estimated to explode as the economy revives, people get back to office, and more Indians get internet access.
“While Amazon Food remains the wild card, economies of scale will allow the company to generate high operating
margins, and the company will continue to reinvest (acquisitions and technology) as it grows. The risk of failure is low, given the company’s post-ipo cash balance and access to capital and its operating risk reflects its exposure to Indian country risk,” said a note by Aswath Damodaran, a professor of finance at NYU Stern School of Business, adding that the stock was “too richly priced for me”. His valuation model gave a fair price of ~41 per share.
Listing payday for investors
Zomato’s stock market debut has resulted in huge mark-to-market gains for its early backers such as Info
Edge, private equity major Sequoia, and Jack Ma’s Ant Group. Sanjeev Bikhchandani-led Info Edge is the biggest shareholder with a 15.8 per cent stake, which is valued at ~15,656 crore.
The average acquisition cost for Info Edge works out to just ~1.16 per share, according to the disclosure made in Zomato’s offer document. The stake of Ant Group, the second-biggest shareholder, is valued at ~13,959 crore, more than 10 times its investment. Sequoia, known for its bet on interest companies first invested in Zomato in 2013, holds 5.1 per cent, valued at ~5,000 crore.