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This article is more than 2 month old.

Bottomline: Zomato, and that missed the bus feeling

Bottomline: Zomato, and that missed the bus feeling
The "we told you so" advocates of Zomato's potential have been proven right, for now. Should you hop on, or look for potential elsewhere?
If you hadn't applied for shares in the Zomato IPO, you might be kicking yourself for having lost out on 66 percent gains by the end of listing day, provided you had managed to get an allotment of course. So, did you make a mistake? Is it time to jump on the bus rather than miss out completely — keeping faith in the potential, and disregarding, seemingly outdated, financial metrics of valuation? Those are difficult questions to answer, and I'm not going to go there. Because I'm not a fortune teller, and I can't possibly work out valuation numbers based on businesses Zomato might get into, and their potential size. So, I'll restrict myself to the known "potential" argument, without putting too many numbers into the scheme of evaluation — because no one knows, and each potential may have unique opportunities, hurdles, profit equations et al.
THE POTENTIAL VALUATION
Let’s talk of the potential for Zomato. Some believe the company can keep growing its food-tech business at a heady pace — though naysayers point to the limited room given real potential market size. Let's take that on board. Now add to it, a potential grocery delivery business. Zomato's investment in Grofers was at a valuation of near $1 billion, according to reports. Let's assume that Zomato's grocery delivery biz valuation in the next few years. Then there's the payments piece that seems like another potential area. Let's say Zomato swiftly acquires 20 percent of Paytm's scale and is valued thus. Given Paytm's expected valuation of $25 billion. That could be another $5 billion. Take out $6 billion from the current market capitalization of Zomato and you still have the food-tech business valued at about $7.25 billion. That works out 5.7x Zomato's GOV. Doesn't seem very pricey given the growth "potential", but still not cheap.
So, I'm still a little wary.
THE POTENTIAL ALTERNATIVES
Now, let's queer the pitch by looking at alternatives. Info Edge, its parent company, too, has lots of "potential" with expected value unlocking in Policybazaar, besides its 15 percent stake in Zomato and its own digital properties: Naukri, 99 acres, Jeevansaathi and Shiksha.
The potential of these and other businesses and others it is incubating, could, in time, be significant. And Info Edge does generate cash. It had a positive EBIDTA of Rs 423 crore in the fiscal ended March 2021, with nominal financing costs.
There are also other options you can look at like Jubilant Foods, that CNBC-TV18 put the spotlight on this Friday, besides upcoming IPOs like that of Paytm and Policybazaar that hail from the digital commerce world. But the big elephant in the room most aren't talking about in the same breath is Reliance Industries. And that's another play to keep on the radar from a "potential" perspective.
ZOMATO OR RELIANCE?
What's common between these two very different companies, one a recent start-up and the other an established enterprise seeing rapid transformation? First, they both are a dominant player in their businesses and enjoy a "right to win" opportunity in their spaces. Zomato is one of two players in food-tech (with Swiggy as the other).
Reliance on the other hand is positioned as a leader in a near duopoly, the telecom sector. It has a dominant position in retail and its omni-channel business is in a three-horse race with Wal-Mart and Amazon (with Avenue Supermart being a smaller, more segment focused contender). Even in O2C it is among the largest players in the Asian region.
Now, let's explore their areas of potential. Among those indicated so far for Zomato are grocery deliveries and payments, both high potential areas. Now let's look at what's so far visible for Reliance. There's telecom and data, omni-channel retail, smart home, e-health, edtech, cloud and data centres (Jio Azure) and low-cost smartphones, to name a few. And this is apart from the transformative work underway in the O2C business as well as the new high potential areas identified, of renewable ecosystems for solar and hydrogen. Put these all together, and you have an equally, if not more, compelling "potential" argument than Zomato.
So how do the two companies stack up on numbers? Forget size, if we stick to metrics like equity valuation to sales for Zomato and Reliance combined, as well as its separate businesses (Digital and Retail, mostly housed in Jio Platforms and Reliance Retail, respectively), we note some interesting indicative numbers.
Reliance's market capitalization as a multiple to its revenues in fiscal-ended 2021 stands at 2.7x compared to 10.4x for Zomato's market capitalization to the gross order value.
 
ZOMATO VS RELIANCE
Key ParametersZomatoReliance
GOV9483NA
Revenues2118486326
EBIDTA-32597064
PAT (Owners')-816.449128
Mcap987321334580
Mcap/Revenues46.62.7
Mcap/ GOV10.4NA
 
If we compare Jio Platforms and Zomato, we end up with market capitalization to revenues and GOV, respectively of 5.68x and 10.4x.
ZOMATO VS JIO
Key ParametersZomatoJio Platforms
GOV9483NA
Revenues211886493
EBIDTA-32532359
Equity Valuation98732491000
Valuation/Sales10.45.68
 
The same done for Reliance Retail throws up 2.7x versus 10.4x for Zomato.
 
ZOMATO VS RELIANCE RETAIL
Key ParametersZomatoReliance Retail
GOV9483NA
Revenues2118157629
EBIDTA-3259789
Equity Valuation98732428500
Valuation/Sales10.42.72
 
Important to note here, is that for Jio Platforms and Reliance Retail valuations are based on their fundraise from marquee investors. The other way to look at some of these players is on the basis of EBIDTA yield (EBIDTA to market capitalization). Based on last year's numbers, the EBIDTA yield for Reliance works out to 7.3 percent, for Jio Platforms 6.6 percent and Reliance Retail 2.3 percent. And while Zomato isn't EBIDTA positive yet, if we were to compare Info Edge on this count, the yield is 0.64 percent.
A JUDGEMENT CALL
Despite all the above comparisons, what’s important to underline is that the businesses we are comparing Zomato with, be it Info Edge or Reliance or upcoming IPOs like Paytm, Policybazaar or Cartrade or even a likely candidate Pharmeasy, are very different. So, the eventual decision to buy or not at a particular valuation is entirely a judgement call. In the absence of future projections—something that most venture capitalists and private investors would base their investment calls on — it is only rough estimates and peer valuations that you have to go by.
For me, though, I'd rather remain grounded by the traditional metrics of cash flows and profitability, than venture out into the unknown on the basis of hope. Zomato, for me, is an IPO I was and am happy to have missed.