Are Info Edge investors betting too much on Zomato valuations?

Going by its latest round of funding, and the business progress, Zomato has seen a bump-up in valuations. A 2% dilution for ₹350 crore investment has raised valuations to about ₹17,500 crore ($2.6 billion). In fact, analysts are pegging Zomato’s valuation anywhere between $2.6 billion and $3.6 billion. HSBC Securities and Capital Markets Pvt. Ltd, for instance, has estimated its valuation at $3.6 billion, as against $0.9 billion on 23 July 2018. This has obviously given a fillip to the sum-of-the-parts valuation of Info Edge’s investments. Zomato is now estimated at ₹451 per share value in Info Edge’s sum-of-the-parts valuation, according to HSBC Securities.

But should investors count too much on Zomato? Sure, its business has been gaining traction. Food delivery business now accounts for about 70% of its revenues.

Such upward revaluations of investments are not new, but it assumes these firms will raise further rounds of funding at higher prices. It also does not take into account cash burn in such businesses, which are still at a nascent stage of development. Zomato, for instance, still burns cash and is at a growth stage.

In its flagship business of recruitment, Info Edge has been seeing better revenues. While Naukri.com also has a roster of nearly 62 million resumes, one worry is rising competition. LinkedIn has been hot on the heels of Naukri.com.

To fend off competition and make further inroads into the market, however, Info Edge has been increasing advertising spends. This ate into Ebitda (earnings before interest, tax, depreciation and amortization) margins last quarter.

“Info Edge’s Ebitda missed our estimate by 6%, mainly because of higher ad expenses, up 25% QoQ and 97% YoY. Management noted a higher spend in Jeevansathi, in particular, leading to a sharp increase in losses, in response to greater competitive intensity," said Jefferies India Pvt. Ltd in a note to clients.

Thanks to all the valuation gains, the Info Edge stock is quoting at a rich one-year forward valuation of around 63 times earnings. However, the rise in valuations at this point perhaps reflects more-than-higher expectations built in as a result of Zomato’s recent funding round.