Voices of reason and fair valuation are ever closely looking at Zomato's precipitous fall in 2022. It has become a case study of sorts, as fair value begins to trump the frenzied storification of a concept.
None other than the so-called Dean of valuation - Aswath Damodaran - has put the stock under radar, and downgraded the valuation to Rs 35, as against Rs 41 that he himself had ascribed a year ago.
The Professor of Finance at New York University revalued Zomato's shares on July 27, after prices hit fair value he had assigned much ahead of its listing in July last year. “The company and the market have changed”, he added in a blog post. “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,” Daodaran said. “For this value to be generated, the company will need to stop paying lip service to contribution margins and adjusted EBITDA, and work on reducing growth in its cost of goods sold.”
Shares of Zomato traded at Rs 44.85 on July 28 at around 10:40am, up marginally from previous close. From this level, Damodaran’s assessment expects a potential downside of over 19 per cent. If it realises, the fall ffrom the peak will be about 80 per cent for the food delivery company. The stock is already the biggest wealth destroyer among the crop of new age consumer tech entrants. Overall, such stocks have made its shareholders notionally poorer by about Rs 3 lakh crore thanks to a widespread selloff.
Damodaran suggested that if prices of shares plunge to Rs 35 level or below, it will be a buying candidate. “A few more weeks like the last two will push the price below my median value [Rs 35], and if it does, I would buy Zomato, as part of a diversified portfolio (and not as a stand alone investment),” he added.
His assessment is in contrast to what Jefferies said earlier this week, calling the fall in share price as "night...before dawn". It set 12-month price target for the stock at Rs 100.
What Has Changed
Damodaran said though the story behind Zomato remains largely the same, a few changes in the macro environment and the company's plan needs to be factored in.
Cash: Thanks to the runaway success of its IPO, Zomato is still sitting on a hefty pile of cash. Zomato being a young, money-losing company, the likelihood of failure acts as a drag on value, Damodaran said. Having cash will benefit the company, he added, since it provides not only a cushion for the firm but also eliminates dependence on external capital for the next few years.
Take Rate: Aswath Damodaran pointed out that the commission, or slice of Gross Order Value (GOV) that Zomato keeps dropping reflects increased competition in the market, costlier delivery and company's foray into newer markets (grocery delivery) with lower revenue sharing. The Take Rate is down to 17 per cent from 21 per cent, he observed.
Erratic Growth: Zomato’s growth in revenue has been lumpy, Damodaran said. It is not clear to him how much of the revenue growth is from acquisitions, and how munch from actual business expansion. Its operating margin is down to negative 42 per cent in FY22, from negative 30 per cent in FY21, he calculated.
Inflation: Inflation is close to 7 per cent in India, higher than around 5.5 per cent a year ago. Damodaran maintains that less-risky companies with pricing power and high gross margins would be less exposed as compared to riskier, money-losing companies. So, Zomato is at a disadvantage on this count.
Fleeing Risk Capital: He also pointed out that compared to a year ago, people are fleeing riskier assets.
Blame Yourself
Investors who bought shares of Zomato near the peak and now nursing their wounds, have themselves to blame. “No matter how tempted you are to blame the financial news, journalists, equity research analysts and others for your decision to buy Zomato at its heights, that decision was ultimately yours and the first step in becoming a good investor is taking ownership of your decisions,” Damodaran said. “Put bluntly, if you live by momentum, you die by it.”
Though at the same time, Damodaran refused to accept that the fall in Zomato share price was vindication of his assessment, humbly pointing out instances where he too has been proved wrong. Aswath's math had valued Paytm at close to Rs 2,000 per share, and the stock is currently trading at Rs 713.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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