Zomato: Investor Euphoria or Bubble?

Zomato, an Indian online food delivery company, listed on July 14, 2021, at ₹115 per share, delivering a strong 53% listing gain and reaching ₹161 shortly after. However, by November 2021, market sentiment shifted, as valuation concerns surfaced given widening losses, weak macro factors, and bearish sentiment in the tech sector leading to a significant correction. The stock declined sharply, bottoming out at ₹41 in July 2022.

However, Zomato experienced an exceptional recovery, surging by 541% from its trough. The stock is currently trading at ₹263 as of September 9, 2024.

Reasons for Plunge in stock Price from ₹161 to ₹41

While Zomato’s growth prospects have improved, presenting a positive outlook, it is crucial to differentiate between the stock’s price and the business’s intrinsic value. While the market price is often driven by multiples and sentiment, the true value lies in the company’s ability to generate future cash flows. Based on our Free Cash Flow model, which factors in Zomato’s future growth prospects and value drivers, we estimate the intrinsic value of the stock to be ₹148.47 per share, significantly below its current market price.

WHAT EXPLAINS THE FRENZY AMONG INVESTORS FOR ZOMATO?

The company’s main appeal to investors does not stem from its current modest revenues and losses, but from its potential to benefit from the anticipated growth in the Indian food delivery and Quick Commerce Industry.

Zomato’s acquisition of blinkit on June 22, 2022 was a significant development as it expanded the Total Addressable market by threefold. There is a contention that blinkit could potentially surpass zomato’s food delivery business in terms of Gross Order Value (GOV), leading market pundits to justify the FY24 earnings with a 386x PE multiple.

However, even if that were to happen, it is questionable whether earnings justify such a high 386x PE multiple, and whether cash flows are enough to support such a high price.

Lets find out!

The value drivers below for Food Delievery	Rs in cr
Indian food delivery market in 2024	₹ 56,533.00
Indian food delivery market in 2030	₹ 2,01,739.00
Growth rate in GOV years 6 years	24.00%
Growth rate in Revenue years 6 years	25.00%
Market Share for Zomato in 2024	57.00%
Expected market share	60.00%
Revenues as percent of GOV 2030	24.00%
Operating Margin in 2030	30.00%
The value drivers for Blinkit	Rs in cr
Total Indian Quick Commerce 2024	₹ 27,000.00
Total Indian Quick Commerce 2030	₹ 2,30,097.66
Growth rate in GOV years 6 years	43.00%
Growth rate in Revenue years 6 years	52.00%
Market Share for Zomato in 2024	46.00%
Expected market share	50.00%
Revenues as percent of GOV 2030	25.00%
Operating Margin in 2030	30.00%

FOOD DELIVERY(₹ in Cr	FY24	FY25	FY26	FY27	FY28	FY29	FY30
Total Indian food delivery	₹ 56,533.33	₹ 73,493.33	₹ 91,866.67	₹ 1,14,833.33	₹ 1,40,096.67	₹ 1,68,116.00	₹ 2,01,739.20
Gross Order Value	₹ 32,224.00	₹ 42,258.67	₹ 53,282.67	₹ 67,177.50	₹ 82,657.03	₹ 1,00,029.02	₹ 1,21,043.52
Revenues	₹ 7,792.00	₹ 10,142.08	₹ 12,787.84	₹ 16,122.60	₹ 19,837.69	₹ 24,006.96	₹ 29,050.44
Operating Profit	₹ 911.94	₹ 1,267.76	₹ 2,131.31	₹ 3,022.99	₹ 4,132.85	₹ 7,302.12	₹ 8,836.18
Present value of FCFF		₹ 427.38	₹ 847.16	₹ 1,211.68	₹ 1,573.59	₹ 2,782.10	₹ 42,105.08
BLINKIT (₹ in Cr)	FY24	FY25	FY26	FY27	FY28	FY29	FY30
Total Indian Quick Commerce	₹ 27,000.00	₹ 40,500.00	₹ 60,750.00	₹ 88,593.75	₹ 1,25,507.81	₹ 1,72,573.24	₹ 2,30,097.66
Gross Order Value	₹ 12,469.00	₹ 18,900.00	₹ 28,755.00	₹ 42,525.00	₹ 61,080.47	₹ 85,136.13	₹ 1,15,048.83
Revenues	₹ 2,301.00	₹ 3,693.97	₹ 5,933.84	₹ 9,239.36	₹ 13,937.29	₹ 20,355.16	₹ 28,762.21
Operating Profit	-₹ 384.00	₹ 189.00	₹ 599.06	₹ 1,346.63	₹ 2,748.62	₹ 4,753.43	₹ 8,628.66
Present value of FCFF		-₹ 183.55	-₹ 87.68	₹ 129.98	₹ 711.72	₹ 1,300.43	₹ 42,203.91

PV of cash flows during next 6 years =	₹ 14,206
PV of terminal value =	₹ 78,816
Value of operating assets	₹ 93,022

Adjusted value of operating assets	₹ 93,022
+ Cash on hand	₹ 12,241
+ Cross holdings in companies	₹ 10,365
Value of all assets	₹ 1,15,628
– Debt	₹ 867
Value of Equity	₹ 1,14,761
– Value of options outstanding	₹ 3,800
Number of shares outstanding	868.78
Value per share	₹ 127.72

The estimated value of Zomato for its combined food delivery and Blinkit business is ₹127.72. Our estimates contain a mix of good and bad news.

On the positive side, the food delivery market in India is expected to continue growing at a healthy rate, and we anticipate that Zomato will maintain its market share. In fact, Zomato is projected to control 60% of the food delivery business and 50% of the quick commerce market.

We expect Zomato’s gross order value and revenues to grow at a compound annual growth rate (CAGR) of 43% and 52% respectively for quick commerce, and 24% and 25% respectively for the food delivery business.

Zomato should be able to expand its margins in line with the global industry average, which is around 30%.

On the negative side, despite expecting robust growth in market size and revenue for both businesses, it is unlikely that the total market cap will exceed ₹1,14,761 crore for both Blinkit and food delivery businesses.

Moving on to the other two businesses of Zomato, namely Hyper Pure and Going Out, the future trajectory of these businesses remains somewhat obscure. Despite this, we have tried our best to predict what the future may hold for both of these businesses.

HYPER PURE	FY24	FY25	FY26	FY27	FY28	FY29	FY30
Revenue	₹ 3,172.00	₹ 4,758.00	₹ 6,899.00	₹ 9,659.00	12,073.75	₹ 14,488.50	₹ 17,386.20
Operating Profit		-₹ 22.50	₹ 52.00	₹ 193.00	₹ 603.69	₹ 1,448.85	₹ 1,738.62
Present value of FCFF		-₹ 372.44	-₹ 388.69	-₹ 386.03	-₹ 95.74	₹ 275.28	₹ 8,369.86

With an estimated ₹7402 cr in Cashflows from HyperPure Business the cumulative value per share comes out to be ₹136.20

GOING OUT	FY24	FY25	FY26	FY27	FY28	FY29	FY30
Revenue	₹ 258.00	₹ 361.20	₹ 505.68	₹ 707.95	₹ 920.34	₹ 1,196.44	₹ 1,555.37

Zomato’s “Going Out” segment has the potential to evolve into a high-margin classifieds business at scale. However, it is currently in a transitional phase and incurring losses.

Applying a more conservative EV/Sales multiple of 5x on FY30 estimates, we derive an estimated equity value of ₹10,620 crore for this segment. This reflects its growth potential while accounting for the ongoing challenges during its current transition.

The consolidated value per share for Zomato, considering all business segments, is estimated at ₹148.47.