Zomato shares overpriced? Valuation guru Aswath Damodaran estimates true value at Rs 41 only

Zomato’s share market debut has ushered in a new era for Dalal Street with new-age technology unicorns on offer for domestic investors; however, value investors are not vying for this piece of the cake. Aswath Damodaran, one of the world’s top valuation gurus, values Zomato at just Rs 41 apiece — significantly less than both IPO price as well as listing price. Aswath Damodaran, Professor of Finance at Stern School of Business, NYU, believes the stock is too expensive, considering the loss-making entity it is right now.

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Zomato share price soared to hit the upper circuit of Rs 138 shortly after listing on Friday, over 82% from the IPO price, helping investors pocket significant listing gains. The debut rally helped Zomato stock reach a market capitalization of over Rs 1 lakh crore, leaving behind companies such as Tata Motors, Vedanta, Indian Oil, and Mahindra & Mahindra — all profit-generating companies. On the other hand, Zomato is still a loss-making entity relying on investors to keep the wheels running. Earlier last week, big bull Rakesh Jhunjhunwala had also expressed concerns around Zomato, saying that he would rather invest in already established businesses.

Investors ill-informed? Not necessarily

Aswath Damodaran refrained from summarily dismissing Zomato IPO investors’ judgement. “I think it is hubris to dismiss those who invested in Zomato at Rs 72 per share or higher, as speculators or ill-informed, since there are plausible stories that get you to values higher than Rs 100 per share,” Aswath Damodaran wrote in his blog. “That said, given my story and valuation for the company, I think that at a  Rs 70-75 per share price, the stock looks overvalued to me,” he added.

Aswath Damodaran argues that Zomato’s business model is neither innovative nor ground-breaking but resembles other such platforms across the world. “The allure to investors comes from Zomato’s core market in India, and the potential for growth in that market,” he said. Food delivery service penetration in India is low when compared to markets such as the United States and drastically low when compared to China. “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,” he added.

Valuation math

The NYU professor, breaking down his valuation math, said that the total online food delivery market in India could reach $40 billion in 10 years. Zomato is expected to get a 40% share of this, in the three-player market then. Currently, India’s food delivery market is dominated by two players, but Jeff Bezos’ Amazon is making a foray into the market.

(Source: Aswath Damodaran)

“With my upbeat story of growth and profitability, the value that I derive for equity is close to Rs 394 billion [or, Rs 39,400 crore], translating into a value per share of Rs 41. That may seem like a lot to pay for a money-losing company with less than Rs 20 billion in revenues in the most recent year, but promise and potential have value, especially when you have a leader in a market of immense size. That said, the stock’s pricing (Rs 72-75, per share) makes it too expensive, notwithstanding my story,” Aswath Damodaran said.

Although Aswath Damodaran believes the money-losing and cash-burning Zomato is currently overpriced, he added that given its potential, he would have no qualms about investing in the stock, if the price drops in the near future.