What is common between Zomato IPO, a Dadar flat and a Hussain painting?

Having been born in a traditional haveli in a small UP town, I was used to houses with large courtyards adorned with huge Neem, Mango, Harsingar trees and huge open terraces. Moving to Mumbai for job was no less than a shock to my senses.

Central Mumbai locality where I found a nest, mostly resembled the vegetable market in my home town. It was crowded, noisy and stinking of fish. There was little space to walk. In the evening, while walking home from the nearby railway station, it was almost impossible to reach home without rubbing shoulders with at least 10 strangers.

A 950 square feet super area apartment in that area, with tiny bedrooms, two cage-like windows and no space to move would cost more than the entire half acre haveli in my home town. I totally failed to understand why someone would buy this jail cell-like dwelling for so much money.

I must admit that I could never appreciate abstract art. I always thought that since so many people admire abstract paintings, these must have some deep meaning. But somehow I could never discern such meaning. Once I had an opportunity to visit home of a prominent industrialist family in Kolkata with my boss, who was a very senior banker.

The house was adorned with many pieces of art. One 7”X5” painting was prominently displayed, in the large hall where we were seated, in a manner that no one could miss paying attention to it. The painting had two or three or may be more horses struggling to outrun each other.

Not being a lover of abstract art, I found it little intimidating. It certainly did not evoke a desire that I must own it. I found the colours little dull for my liking. The eyes of horses were not expressive enough to me.

“You know this is Hussain. It must be worth few million dollars,” my boss suddenly said in a hushed voice. I could not make out what he was alluding to – the greatness of the painter, beauty of his art; or the worth of the businessman who possessed it.

The Value Of Money

A few years later, I realised that the value of money in Mumbai and my town was not the same. At my place people would use money as “means” to achieve the state of happiness.

Obviously, the money had much greater value there. In Mumbai, most people worked hard for the money itself as a goal. The money had little value there. If I may use the football analogy, in my home town, money is the goal that would give you the FIFA World Cup.

In Mumbai, money is the goal in a game you played with your friends in a neighborhood park. It would just give you adrenaline rush for a couple of minutes.

In due course, I also started to appreciate that value of art lies in the eyes of the person who creates it or who desires to possess it. For all others, it could be a matter of curiosity or irrelevance.

I feel that investing in new generation businesses is similar to valuing a house in Dadar (Central Mumbai) or a work of Hussain. Applying the conventional methods of valuations to these businesses might not be appropriate. Simply because these businesses are quite unlike the conventional businesses. These businesses, for example, -

• are mostly technology-driven;
• could be potentially scaled to very large proportions very fast, as geopolitical boundaries do not hinder their operations;
• could have extremely unpredictable revenue streams as many seemingly diverse and unrelated services and businesses could be easily added to the primary service/business;
• have a great deal of uncertainty about the profitability even in mid-term;
• do not strictly follow the distinction between the sources of cash flow i.e. from operating, financing or investing activities;
• have very diverse ownership which may not be committed to the business for long term;
• are commonly funded by pseudo equity, i.e. the promoter, private equity and/or venture capital firms, could be funded by debt or quasi equity in multiple layer;
• may not have clear regulatory and taxation regime at present, as these are also in evolutionary stage and may or may not evolve in favor of such business;

While in some cases, the shareholders who bought these businesses a few years ago at seemingly unsustainable valuations have been rewarded well. At the same time, there is no dearth of ecommerce ventures that have failed miserably, resulting in significant losses to investors.

In the Indian context, the proposed initial public offerings of food delivery application Zomato and payment gateway Paytm have triggered an intense debate of the valuations of these new generation businesses. A majority of experts and analysts find the valuations of these businesses (especially the sharp spike in past one year) inexplicable and unsustainable.

The Valuation Game

The valuation of Zomato business has apparently risen by 75% in past four months alone (from $5.2 billion in last funding round to $9 billion in IPO at upper range). Nonetheless, the consensus market view is that these offerings will not only pass the muster easily, but may also provide decent listing gains to the successful applicants.

My view, specifically to Zomato public initial offering is that –

1. Insofar as the business of food delivery in India is concerned, it is here to stay and shall continue to grow for some decades.
2. The market shall find a way to value these businesses in due course, as the ecommerce market become mainstream. Till then it is mostly a flight of faith. All numbers and methods presently being used are debatable and could be rejected or accepted depending on the degree of faith of the person arguing.
3. We shall of course continue to see a large number of redundancies in this space, as we have seen in civil aviation, telecom, mining, infrastructure, real estate etc. businesses in past two decades. Nonetheless there will be money to be made.

Remember, if a Hussain does not provoke a deeper thought in you, it’s ok not to admire it or aspire to own it. Similarly, if you would find living in a 950 square feet 2bkh Dadar house suffocating, no need to pay Rs 60,000/square feet for it.

To the question “whether I am applying for Zomato IPO?” my answer is that about 200 shares worth about Rs 15,000 allotted or not allotted will not make an iota of difference to my life.

Also read: 10 key things to know about the issue and the company

I would rather spend my time and energy analyzing the factors supporting the tremendous rise in global ecommerce in past one decade. Prima facie, I believe that it is much more than the mere convenience and scalability. Will share my thoughts on this later.