- July 29, 2022
- Posted by: Ramkumar
- Category: Posts
A Review Of Zomato Pricing
I have been 𝐭𝐫𝐚𝐜𝐤𝐢𝐧𝐠 𝐙𝐨𝐦𝐚𝐭𝐨 𝐚𝐧𝐝 𝐯𝐚𝐥𝐮𝐢𝐧𝐠 𝐭𝐡𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐲 𝐞𝐯𝐞𝐫 𝐬𝐢𝐧𝐜𝐞 𝐢𝐭 𝐟𝐢𝐥𝐞𝐝 𝐢𝐭𝐬 𝐃𝐑𝐇𝐏 𝐭𝐨 𝐠𝐨 𝐩𝐮𝐛𝐥𝐢𝐜. At the time of IPO, I valued the company at 𝐑𝐬.𝟒𝟓/𝐬𝐡𝐚𝐫𝐞 𝐚𝐠𝐚𝐢𝐧𝐬𝐭 𝐭𝐡𝐞 𝐑𝐬.𝟕𝟐 𝐭𝐨 𝐑𝐬.𝟕𝟔 𝐬𝐮𝐛𝐬𝐜𝐫𝐢𝐩𝐭𝐢𝐨𝐧 𝐩𝐫𝐢𝐜𝐞. Thus, in my view, Zomato is overpriced if it focuses on the food delivery business, which has cut-throat margins as 𝐭𝐡𝐞 𝐩𝐚𝐭𝐡 𝐭𝐨 𝐩𝐫𝐨𝐟𝐢𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐟𝐨𝐫 𝐭𝐡𝐞 𝐜𝐨𝐦𝐩𝐚𝐧𝐲 𝐰𝐨𝐮𝐥𝐝 𝐭𝐚𝐤𝐞 𝐭𝐢𝐦𝐞
However, the recent merger of Zomato with Blinkit is positive news for its shareholders for the following reasons:
1)It allows Zomato to move towards a quick commence business with an addressable TAM of $45 billion with a good market in Tier1 /metros cities. For example, 𝐈𝐧𝐝𝐢𝐚’𝐬 𝐩𝐞𝐧𝐞𝐭𝐫𝐚𝐭𝐢𝐨𝐧 𝐢𝐧 𝐪𝐮𝐢𝐜𝐤 𝐜𝐨𝐦𝐦𝐞𝐫𝐜𝐞 𝐚𝐬 𝐚 𝐩𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐨𝐟 𝐨𝐧𝐥𝐢𝐧𝐞 𝐠𝐫𝐨𝐜𝐞𝐫𝐲 𝐢𝐬 𝟏𝟑% 𝐜𝐨𝐦𝐩𝐚𝐫𝐞𝐝 𝐭𝐨 𝐂𝐡𝐢𝐧𝐚 (𝟕%). Its only competitors are Swiggy and Zepto.
2) Zomato’s platform, similar to Swiggy, already has loyal subscribers, which will help Zomato to cross-sell this additional service, thus allowing it to expand.
When I valued Zomato, the value drivers I identified were:
2)Target Margin: How long will Zomato take to become profitable?
3)Quality of growth/reinvestment
When I did a 𝐛𝐢𝐯𝐚𝐫𝐢𝐚𝐭𝐞 𝐚𝐧𝐚𝐥𝐲𝐬𝐢𝐬 𝐭𝐨 𝐝𝐞𝐭𝐞𝐫𝐦𝐢𝐧𝐞 𝐭𝐡𝐞 𝐞𝐦𝐩𝐢𝐫𝐢𝐜𝐚𝐥 𝐫𝐞𝐥𝐚𝐭𝐢𝐨𝐧𝐬𝐡𝐢𝐩 𝐛𝐞𝐭𝐰𝐞𝐞𝐧 𝐭𝐡𝐞 𝐞𝐪𝐮𝐢𝐭𝐲 𝐯𝐚𝐥𝐮𝐞 𝐭𝐨 𝐠𝐫𝐨𝐰𝐭𝐡, 𝐦𝐚𝐫𝐠𝐢𝐧, 𝐚𝐧𝐝 𝐫𝐞𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭, 𝐭𝐡𝐞 𝐜𝐨-𝐫𝐞𝐥𝐚𝐭𝐢𝐨𝐧 𝐚𝐧𝐝 𝐫-𝐬𝐪𝐮𝐚𝐫𝐞 𝐚𝐫𝐞 𝐦𝐚𝐱𝐢𝐦𝐮𝐦 𝐟𝐨𝐫 𝐫𝐞𝐯𝐞𝐧𝐮𝐞 𝐠𝐫𝐨𝐰𝐭𝐡, the analysis implies that Zomato’s share price would increase with growth in revenue against improvements in EBIT/reinvestment.
Thus, inorganic growth becomes crucial for Zomato to justify its valuation. Further, Zomato has:
a)Cash reserves of 75 billion INR and
b)Total Debt of Rs.1.1 bn, for which the effective interest rate is 15%
Thus, it does not make sense for Zomato to pay by cash or raise debt which gives it no other choice but to issue shares. In my view, by issuing shares, both the buyer/seller are sharing risks.
I believe Zomato is in the right direction to maintain its duopoly in the instant grocery and food delivery business.
Further, Zomato has a platform with millions of subscribers, giving it optionality and exclusivity to expand to other businesses seamlessly. This optionality provides a premium to its existing DCF valuation.