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For years, Indian investors outside the private capital markets watched in awe at the billions of dollars being poured into loss-making internet firms. But with the Zomato initial public offering (IPO) opening the doors for public market investors to invest in these firms, it’s now the turn of private market investors to watch in awe and disbelief.

Zomato ended the first day of trading 65.8% higher compared to its IPO issue price, giving it a valuation of $14.2 billion. Note that its close competitor, Swiggy, was recently valued at less than two-fifths of those levels, or $5.5 billion, after a $1.25 billion fundraise in the private markets. Clearly, public market investors, drunk with liquidity, are far more imaginative about the promise and potential of internet firms than their counterparts in the private markets.

Until the IPO, the two firms were neck-to-neck in terms of valuations. A $156 million fundraise in the first half of 2020 had valued Swiggy at $3.65 billion. Soon after, Zomato raised $660 million at a $3.9 billion post-money valuation. On a pre-money basis, Zomato was always valued lower compared to Swiggy, until this year.

Public-private divide
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Public-private divide

The stark difference in valuations between the similar-sized food delivery platforms puts on display the widening gap between public and private market valuations after the pandemic. While private market investors have turned cautious, public market valuations have exploded.

Data firm Pitchbook said the average EV/Ebitda valuation multiple for US private equity (PE) deals stood at 13 times in the 12 months till June 2021. At the end of March 2020, this measure stood at 15.2 times. In the case of the S&P 500, the EV/Ebitda valuation multiple has risen from around 15 times before the pandemic to around 19-20 times.

While public market valuations are being driven by high investor sentiment and momentum trades, private market investments tend to be relatively more considered and careful, or so it now seems. This wide disparity in valuations is even causing many PE firms to exit or book profits using the IPO route.

“With multiples now substantially higher in public markets, PE firms have been more aggressive in listing portfolio companies," said a report by Pitchbook earlier this month, adding that 2021 is set to be a record year for listings.

In the case of Zomato and Swiggy, the contrast in valuations is far greater. At current prices, Zomato is valued at over 20 times estimated revenue for fiscal 2023. This is more than three times the average valuation of global food delivery firms. Swiggy’s valuations are only slightly higher than the global average, in comparison.

Also note that Aswath Damodaran, an expert on corporate valuation, puts a value of $5.25 billion on Zomato, based on assumptions that are “upbeat on growth and profitability", to use his words. “That may seem like a lot to pay for a money-losing company with less than 2,000 crore in revenues in the most recent year, but promise and potential have value, especially when you have a leader in a market of immense size," Damodaran wrote in a blog post.

Of course, just like private market investors have made mouth-watering returns on their bold bets with Zomato, it’s entirely possible that the growth of the food delivery firm lives up to the far higher expectations of public market investors. But as Damodaran warned, high growth can attract higher competition, and with Amazon waiting in the wings, return expectations may need to be toned down a bit.

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