June 01, 2023

Is Zomato Overvalued?

By A Special Correspondent
First publised on 2021-07-12 10:35:57

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How does one value a tech-enabled company that is making losses despite a good business model, has all-India market acceptance, has big-ticket investors and is providing a service that is much in demand (although it has competitors, both at national and local levels), now more than ever due to the pandemic situation? The expected Rs 60000cr valuation of Zomato has come under fire from many quarters as its IPO is going to open for subscription on July 14.

While it is true that traditionally, tech-enabled companies and also other companies in the virtual world are valued differently, one does think that sometimes these valuations go over the top. The food delivery business is expected to log in above average growth in the next few years and Zomato (along with Swiggy) is expected to corner a large chunk of that business. Then there is the parcel delivery business that has also caught on in a big way. The business outlook for Zomato is the near term is excellent and is likely to remain so as people find it convenient (time, traffic congestions, lack of parking space and price of fuel all play a part) to order food instead of taking the trouble of visiting restaurants or get parcels instead of collecting them on their own. Further FDCs like Zomato have also started delivering liquor in some states and are looking at the highly lucrative but extremely competitive grocery sector.

All these ventures are expected to add to the bottom line and perhaps the company will start making profits sooner rather than later. There are two things that might prevent that. The first is the propensity to offer discounts, sometimes deep discounts, to attract and retain customers. These discounts are habit forming for customers and competition makes it a vicious cycle which a company cannot escape. These discounts often make these companies bleed. The second is the relations with food outlets. Zomato has been in trouble with restaurant bodies all over India for what they term its unfair business practices. Many restaurants have terminated their agreement with the company.

If Zomato can stay ahead of the competition, have good relations with food outlets and if it can think of a way to reduce or do away with discounts, one thinks that the company can command a valuation of Rs 60000cr. But those are too many ifs and the situation can change very fast for the valuation to seem completely over the top. Hence, the doubts being expressed within the investing community are not unfounded.