Zomato’s share price rose more than 4% on Wednesday after the company reported increased losses, but substantial revenue growth from its earnings for the quarter ended June 2021.

Is the euphoria around new business actions justified? With Initial Public Offerings (IPOs) at high valuations hitting the markets every other day and the continued rise in stocks and most asset classes, CNBC-TV18 spoke with the guru of the assessment Aswath Damodaran, professor of finance at the Stern School of Business at New York University, to answer this question.

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Damodaran believes that when it comes to these companies, you have to stay away from measures that extend to current profits, current income.

“No matter what I think of Zomato or any other startup, be it Airbnb, Ola or Uber, scaling current metrics will always give you absurd numbers. Why? “Because you are buying for the future. You are not buying what is there right now. You are buying on potential, you are buying on hope and there is nothing wrong with doing that. The question is , is your potential or hope is reasonable or are you just making things up? Are you doing it in a fairy tale? My concern with some of these young companies is not that you pay for future potential, but that we are not asking the right questions about these companies before deciding how much to pay, ”he explained.

Damodaran teaches stock valuation as part of one of his courses at Stern and he caused a sensation on Twitter when before Zomato’s IPO he said he would value Zomato at Rs 41.

Zomato’s strengths

According to Damodaran, it dominates the Indian online food delivery market and the Indian online food delivery market has a lot of growth potential.

“The growth is going to be very closely related to two things – how quickly India is developing as an economy, because if you don’t have disposable income you don’t order from a restaurant, and the second is how quickly Indian eating habits are changing. I mean, I set an example and my experience they are getting too old to have any resonance growing up in India, eating well out was not the way to go. I mean, clearly things are changing, ”he said.

The stock price debate

The Stern University professor sees India becoming more prosperous in the future with an increasing number of Indians ordering food. Since Zomato will be a key player, he still believes the share price should be around Rs 40.

“Does that mean everyone buying Zomato at Rs 130 is crazy? Not at all. It just means that from my point of view it doesn’t make sense for me to buy. be a personal decision. And from that perspective, that’s what bothers me about Zomato is that the things that have to happen to justify the price, I just don’t see as plausible. so my decision, ”he said.

The promoters of Zomato spoke of a cultural shift and shift. The company’s projection is that people will start ordering six times a week.

“I think that’s a reasonable guess, whether you go from one to six or from one to three, that’s the question. What if all three came through Zomato, whether people are going to use Swiggy or Amazon Food is open So even if I take that premise, it doesn’t lead me to pricing, ”Damodaran said.

Which justifies Zomato at 130 / share

The only way Zomato can be valued at Rs 130, according to Damodaran, is to replicate its success in the food delivery market by providing groceries and health services.

“You have to massively expand the market to come up with pricing. So that’s not a good enough story and the fact that even optimists don’t give a big enough story to justify Rs 130 is troubling,” Damodaran said.

(Edited by : Abhishek Jha)

First publication: STI


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