Ashwath Damodaran revalues Zomato shares below current stock price

On July 21, 2021, finance profession and valuation guru Ashwath Damodaran valued Zomato shares just ahead of its initial public offering at about ₹41 per share, and after a year, the stock was trading at ₹41.6 apiece on the BSE at close of trading on July 26, 2022, as the counter started crashing after post the ending of the mandatory pre-IPO shareholders lock-in period on July 23, 2022.

Incorporating the updated financials for Zomato (with the doubling of revenues in conjunction with larger operating losses) and the higher cost of capital, from macro developments, Ashwath Damodaran revalued Zomato shares on July 26, 2022 at ₹35 apiece.

“Note that my core story for the company has not changed, but its Blinkit acquisition suggests that Zomato is planning a substantial foray into the grocery delivery business (pushing up the total market size currently and in the future), albeit at the expense of a smaller slice of revenues and a smaller market share," he said in his blog post.

He explained that the value per share of Zomato has dropped from ₹40.79 to ₹35.32 per share, with much of the value change from last year is coming from macroeconomic developments, manifested in a higher cost of capital. For this value to be generated, the company will need to stop paying lip service to contribution margins and adjusted EBITDA, and work on reducing growth in its cost of goods sold.

“As with my valuation last year, let me emphasize that this is not the valuation of Zomato, but is my valuation and it will inform my decisions on the company. I have a story for Zomato, and valuation inputs that reflect that story, but I could be wrong on both fronts,” he added.

Zomato shares made stellar debut on July 23, 2021 on the stock exchanges, but the stock has lost more than 65% of their value since then on concerns about valuations and as global growth stocks cratered.

The stock has been falling since then amid a global carnage in tech stocks. Investors have also not been comfortable with the acquisition of Zomato's acquisition of Blinkit for ₹4,447 crore which acted as a catalyst in the food delivery platform's downward movement as Blinkit is a loss making start-up. Zomato share price closed at ₹46 apiece on the BSE on Friday.