Zomato Ltd’s shares were valued at Rs45 a piece a year ago, Rs58 six months ago and Rs76 in its initial public offering (IPO). Trading in the grey market ahead of the IPO suggested the offer pricing was stiff, and there was hardly any money left on the table. But to everyone’s surprise, the shares listed at Rs126, and now trade at Rs136 apiece.
Spare a thought for the sell-side brokers who may feel compelled to issue buy reports on the latest fad in town with even higher price targets. As it turns out, they have taken the challenge with gusto and three large brokers have come up with a target price that is higher, and curiously almost identical.
JM Financial Institutional Securities Ltd and Jefferies India Pvt. Ltd have initiated coverage on Zomato with buy ratings, with both setting a target price of Rs170. UBS Securities Asia Ltd has set a target price of Rs165 per share 12 months ahead. In present value terms, this means the three brokers value the firm at around Rs150, or exactly double the price at which the firm sold shares in the IPO.
A moot question is how the brokers have arrived at a valuation of about $17 billion in present value terms for a firm that was valued at $5.4 billion less than six months ago. It’s all very well to say Zomato holds great potential and promise in the long term – sell-side brokers have the unenviable task of putting numbers on vague terms such as promise and potential.
“We value Zomato as of March 2030 using an 11 times EV/adjusted sales multiple (Doordash currently trades at ~11 times estimated 2022E EV/Sales) to better factor in its long-term growth potential. We discount this valuation back to Sep’22 to derive our TP of INR 170 per share," say analysts at JM Financial. The broker also estimates revenues to grow at 46% each year between FY21 and FY26. Put simply, the assumptions are of high growth enabling Zomato to reach the scale of some global peers some nine years from now.
Over to UBS, which says Zomato’s higher valuation multiples need to be seen in the context of higher growth. “Zomato's FY24e EV to sales of 17 times compares with 2-9 times for global food delivery businesses although its growth is higher at 40-50%, versus 20-30% for other platforms." EV is short for enterprise value. UBS further adds, “In e-commerce, emerging market platforms such as Sea, MELI and Allegro trade at premium to Chinese and developed market peers due to superior growth rates." The foreign broker also highlighted a rarely used ratio called the EVSG ratio. This is derived by dividing the EV-to-sales multiple by the expected growth rate. This is quite similar to the price/earnings to growth (PEG) multiple, although seeing an out-of-the-common ratio seems apt for a stock that many are struggling to grapple with.
In principle, analysts at Jefferies’ analysts concur, when they say that Zomato’s valuation has to be viewed in the context of a longer growth runway, premium enjoyed by Indian stocks across consumption categories & the aspect of scarcity premium. The only other Indian food delivery firm, Swiggy, is still tapping the private capital markets for funding, so it has to suffer modest valuations of $5.5 billion. Zomato’s bold bet of plunging into the public markets gives it the advantage of intangibles such as scarcity premium et al, giving it a valuation that is three times its close competitor.
In number terms, this is how Jefferies’ analysts arrive at their target price: “We value the delivery franchise at 2.5 times FY26E GMV, dine-out/Zomato Pro at 10 times FY26 revenues and Hyperpure at 1 time FY26E revenue. We discount it back to arrive at a 12-month price target of Rs170." The MNC broker has assumed average annual growth of 45% for Zomato’s GMV till FY26, about double the rate of global peers.
It’s intriguing that all three brokers estimate revenue growth in the mid-40s. And for Jefferies and JM, their cash flow estimates for the foreseeable future are negative. The message for the Zomato management from the analysts’ community is clear: “Deliver big on growth. Cash flows can wait." It will be interesting to see if the company toes the line, or sticks to its stated goal of pursuing profitable growth.