Any thoughts on this…
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How has he estimated that Zomato could have built the same itself for less than 200 crores?
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Maybe he is wrong about the Rs 200 cr figure, but can one be comfortable with the valuations at which the deal has been done? Wanted to understand the viewpoint of fellow boarders.
(Interestingly, similar concerns about the valuation at which Blinkit was acquired were raised, however, Zomato management’s decision proved to be right.)
Disclosure: Invested at very low levels and planning to hold
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Contrarian EPS has provided valuable insights to many investors through his tweets. While his opinions are generally sensible and useful, particularly when it comes to traditional businesses. He has consistently held a negative view of Zomato since its inception. I’ve been following him for a long time, and he is not invested in Zomato.
Zomato, however, has a strong board, particularly with Mr. Sanjeev B, who holds the highest stake in the company.
Out of context, SB becomes board member of MMT. MMT paid him renumeration as board member, instead of taking in his personal account, he deposited it in to infoedge account, as he believes his all-time should allocate to infoedge.
Although mistakes can happen in business (such as the investment in housing.com by SB), overpaying for some assets is often less concerning. While it may appear that Zomato overpaid in this deal, strategic decisions in business sometimes require to take such deal. I believe there could be two reasons for pursuing a deal even if it seems costly:
Competitive Concerns: 3rd party, possibly Adani, might have been interested in the same deal. If that had happened, the market could have become more competitive with three players: BookMyShow (BMS), Adani, and Zomato. Now it’s duopoly with this deal.
Disruption Potential: I strongly believe BMS is vulnerable to disruption. Despite being in the market for a long time, their revenue has stagnated at around ₹800 crore (according to a CNBC report, although no specific source is available). Zomato’s CEO, who is one of the smartest entrepreneurs, likely didn’t want to wait any longer to make a strategic move.
Disclaimer: I am invested in Zomato, and my views may be biased in favor of Zomato and most new-age entrepreneurs.
My mistake: Eventhough invested around 50 and following it from IPO, couldn’t able to increase my allocation.
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Even though Zomato’s value has surged 5 times from $5 Bn to over $25 Bn in the last 2 years, but I believe we are missing the biggest point!
The more relevant and most underappreciated fact is that the rise has happened when roughly 40% of its total equity was actually being sold by pre-IPO investors/owners in open market! Ownership of Uber, Alipay, Tiger Global Management, Sequoia and more have fallen to 0% or at below 1%. Just last week, Antfin sold its 2.12% stake in Zomato.
India has never seen a similar circumstance before, where a listed entity has continuous supply of shares being dumped in the market, adding to its free float, but the share prices doesn’t stop rising & goes on to become part of ‘Top 50’ most valued listed entity in the same time frame.
𝐐: 40% was sold, did the retail investors buy it?
𝐀𝐧𝐬: NO! The share of individual investors have actually fallen from 9.88% two years ago to 8.67% today.
Then WHO BOUGHT IT?
INSTITUTIONS! (The FPIs now own 55% of Zomato, includes Govt. of Singapore, Canadian Pension Fund, etc., and many domestic MFs which collectively own 13%) - Detailed analysis of this coming soon.
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InfoEdge from Sept 2021 - 15.23% to June 2024 - 13.53%
Deepinder Goyal from Sept 2021 - 4.71% to June 2024 - 4.19%
Slow and steady …
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@prashanti - There is an angle of Blinkit merger here which happened in 2022 which was an all stock deal - because of which the equity base increased. None of Infoedge & Deepinder Goyal have actually sold!
Rather within next 2 years as ESOPs allocated get converted to actual shares, Deepinder’s holding is bound to increase significantly.
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Me too holding from IPO and almost at 60. But could not increase allocation. It flew off before I could decide.
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“Ola Consumer nears 1 lakh daily orders on ONDC; Bengaluru food delivery at 20% of Swiggy-Zomato’s scale: Bhavish Aggarwal”
What views do you all have on other players grabbing food delivery share through ONDC in general? Does it seem like a risk to the duopoly of Zomato & Swiggy?
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People on socials have been mentioning a lot on Zomato/ Blinkit in last few months, is it impacting the share price?
In the last 2 years as share price of Zomato has rocketed by 5X, one might think a lot of retail investors are buying into the story. Also because more & more people are now getting to know & experience quick commerce i.e. Blinkit - loyal customers tend to become shareholders more often! (agreed?)
One must note that Zomato’s listed shares have witnessed roughly 45% of its equity being sold by top PE funds & others in last 2 years ever since the lock in restriction by SEBI got over since 25th July, 2022 (which is 1 year post listing). Sellers include Uber, Alibaba Group, Tiger Global Management, Sequoia & more. So there is a huge gap inform of free float that got added, retail investors might have filled some of that gap, right?
BUT DATA TELLS A DIFFERENT STORY!
Retail investors own barely 8% of Zomato and their holding has not increased (rather falling over 2 year period!). Neither do analysis of google search trends confirm any rise in interest in share price of Zomato in last many months!
This week we presented a detailed analysis on fast changing share holding patterns of Zomato in the last 2 years on ‘Finding Outperformers’!
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Zomato added 400,000+ unique shareholders in the first six months of 2024, but does it move the needle in increasing the share price?
Buzz around Blinkit and Zomato has been rising lately on platforms like LinkedIn and X. Whether it’s the growth of quick commerce, with Blinkit as the largest player, or new initiatives and features launched by Zomato, including the upcoming ‘District’ app, they have been attracting attention. This, in turn, has led to many new retail investors buying the stock recently as the data shows.
BUT IT’S NOT ENOUGH TO MOVE THE NEEDLE!
While the absolute number of additions in 2024 looks significant, in terms of the total percentage of shareholding, it actually isn’t. New retail investors buying Zomato stock in the first six months of 2024 didn’t even result in a 1% rise in retail shareholding. This percentage is minuscule, especially considering that Alibaba Group just in August 2024 sold a 2.40% stake in Zomato in one go, contributing to a total of 43% shareholding being sold by various investors over the last two years.
One might assume there’s a frenzy with everyone discussing the same company, but that might not be the case just yet! Any thoughts?
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One key reason Zomato witnessed a sharp selloff at time of acquiring Blinkit was actually its shareholding pattern!
Year 2022 was a nightmare for many tech funds globally. After enjoying the boom in 2020-21, many faced their sharpest drawdowns in 2022-23. As a result, many were eager to exit their investments in developing markets to reduce their risk and create liquidity back home.
Two of those funds were actually - SoftBank Group Corp. & Tiger Global Management, who collectively owned ~65% of Grofers (now Blinkit!)
The acquisition was an all-equity deal, where Grofers’ shareholders were awarded listed Zomato shares. This was seen as an easy exit for Grofers’ backers, as the company was far from going public, and most big VCs were unwilling to inject more funds to combat rising competition or buyout their stake. Roughly 63 crore new shares were issued leading to 8% dilution for Zomato’s exiting owners.
The markets had already anticipated that these shares would get dumped by the funds as soon as the regulatory lockin period by SEBI post acquisition gets over - which would further add to the free float. That’s exactly what happened as today both Softbank & Tiger Global are no longer shareholders of Zomato.
Hence they gave a thumbs down to the deal!
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Spent some time on a Zomato DCF. Forecasted until 2030, and then did a high level extrapolation until 2040. Fair value is coming to Rs.238/ share, 14% below current price. Although, TP is very sensitive to discount rate. At 1% lower WACC TP is Rs.295/ share.
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- Core anti thesis is not on the growth, it is on the margins.
Zomato, Swiggy today take anywhere between 20-25% from restaurants on the overall bill.
ONDC run models (magicpin, Ola) charge much lesser, and are scaling up fast.
Try reducing revenue from 20% of GMV to 12% for Zomato, and see the magic on valuations. - Almost entire pre-IPO shareholding of Zomato has now been sold. This is not an anti thesis but important to note that all those shareholders who invested and held till the IPO, sold as the post IPO lock-in ended.
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Zomato's Overvaluation: A Closer Look
Zomato’s current revenue stands at approximately ₹14,000 crores.
For the sake of analysis, let’s assume its revenue grows 15x over the next decade, reaching ₹2,00,000 crores by 2034. (This is an extremely optimistic scenario.)
To put this in perspective, Zomato’s projected revenue in 2034 would surpass the combined sales of companies like DMart, HUL, Nestlé, Varun Beverages, Britannia, Dabur, Emami and many more.
Now, assuming Zomato achieves a 5% net profit margin, similar to DMart.
That would translate to a profit of ₹10,000 crores.
Applying a P/E ratio of 50, Zomato’s market capitalization would reach ₹5,00,000 crores.
In this very optimistic scenario, Zomato’s stock would only double in value over 10 years.
Also Zomato has immense competition from Instamart, Big Basket, Zepto, Jio Mart, and many others.
Even Amazon and Flipkart will venture into this.
Instead of investing in Zomato, consider putting your money in a FD at 7%.
Over 10 years, you would get the same returns, but with much less risk.
This highlights the level of hype and speculation that drives Zomato’s Stock Price
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Any thesis on the reinvestment of cash generated over these years? Any assumptions on Districts vertical (think coldplay) and any other new stream getting generated over these 10 years.
Also I think 15x (~31% CAGR) is not extremely optimistic (average case in my opinion) over 10 years, What is the TAM here?
- For Q-comm - all offline stores like Kiranas, electronics etc., e-commerce, shopping marts etc.
- For food delivery - with increasing traffic, women/men workforce participation, etc. factors
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Zomato’s standalone net profit margin for the current year stands at 20%. However, in a more optimistic scenario, a 5% net profit margin is not considered a favorable outlook.
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Zomato has not earned a profit. On screener their OPM is 2% percent. If you remove other income then they are loss making, so yes 5% npm is high. India is a price sensitive market, if groceries are at huge markup or food from restaurants, people will not use Zomato.
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