Question: What was the emperor wearing?

Answer: It was high tide, no one knew!

Not sure if this joke resonates, but i was reminded of Warren Buffet’s quote as Zomato is getting listed on the Street.

A while ago, we dived deep into Zomato’s business and evaluated its discounted cash flow valuation. At a valuation of $1.1 billion, it reflected the weak economics that has been the talk of the market. The current issue price of Rs. 72-76, values Zomato at ~$9 billion, approximately 9x the valuation through DCF.

The argument is that as an Internet stock, Zomato should be valued differently from traditional businesses. The network effect from controlling the value chain of procurement, restaurants and customers would result in controlling the food ecosystem that would eventually make up for the investment.

Amazon was unprofitable for the first 5 years but Wall Street bought its story of ‘The Everything Store’ and its share price rose nevertheless. Wall Street also saw Amazon’s best-in-class growth fundamentals and superior cash-flow conversion which made Amazon the Internet juggernaut it is today.

Which is to say, can Zomato do an Amazon?

This is a question on growth and unit economics of Zomato and if they resemble the characteristics of Amazon. Does the current landscape allows Amazon-like growth which Zomato has covered since its inception 13 years back. More importantly,

• As a private company, is Swiggy positioned for better growth targeting more spend on customer acquisition?
• Can the new competitor Amazon hurt the unit economics by providing higher customer discounts and greater commissions to the restaurants?

The jury is out on this question but Zomato would have enough cash in its kitty to think through these problems. Meanwhile it is doing what it does best – controlling the narrative.

We bring a multiples comparison with the global peers and a relative valuation on EV / Sales of Zomato through the Samkhya platform:

At $8.58 billion and 30x EV / Sales, Zomato is at the top quartile of its peers which are currently between 4.3x – 30.3x 2020 sales. Its valuation is up 58% from the last round price of $5.4B.

At a 30x EV/Sales, there is an asymmetric risk-reward potential – limited upside and more downside. In a bear-case, it would go back to 15x, a multiple where its peer Swiggy is also valued. This would mean a loss to retail investors who would be entering the market at the 30x price.

In a bull case scenario of 40x EV/Sales, Zomato would become a poster buy of Internet companies, continuing to grow at 40-50% annually with industry-leading unit economics which can come on account of it leading & controlling the food ecosystem.

There is enough liquidity in the market right now to fuel the momentum towards Zomato especially with a compelling narrative that has been crafted since Covid. In other words, the bulls might reign in until there is liquidity crunch or a change in narrative or both.

This report contains company financials based on publicly available information. Samkhya did not receive any compensation from Zomato for the report. This report is not investment advice or an endorsement of any securities. Please read our T&C.​