India’s leading online food delivery company Zomato is a money-losing entity currently but has a lot of potential to become an efficient and viable business model, said renowned valuation expert Aswath Damodaran in his latest blog post.
“Zomato is a money-losing, cash burning enterprise now, but it has immense market potential and is on track to delivering on a viable business model,” said Damodaran, who teaches corporate finance and equity valuation at the prestigious Stern School of Business at New York University.
He further said that the company will face a lot of challenges in terms of management and competition along with those related to the economic and political developments in the country.
Damodaran, however, added that even though the company is currently over-priced, he would look at investing in the shares of the firm if there is a correction in the near future.
“… I would have no qualms about investing in the stock, if the price drops in the near future, with the full understanding that this is a joint wager on a company, a sector and a country,” said Damodaran who is followed by more than two lakh people on Twitter.
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The 63-year-old Damodaran, who is often referred to as ‘Dean of Valuation’ due to his authority on the subject, further mentions that while Zomato is still a money-losing start-up, it is not an entity that is facing imminent failure.
Further explaining the rationale behind the company making losses, Damodaran says that the losses are only because the company is young and is trying to tap the huge growth potential of the market.
“The biggest reason that Zomato is losing money is because it is a young company that is trying to take advantage of a market with immense growth potential, not because it cannot make money. In fact, if Zomato cut back on customer acquisitions and platform investments, my guess is that it could show an accounting profit, but if it did so, it would be worth a fraction of what it is today,” explains Damodaran.
Listing down the pros and cons, the Indian-origin professor states that given its size, Zomato has access to capital and an augmented cash balance post the IPO even as it continues to burn cash and will need access to capital in the coming years as well to survive.
Interestingly, Damodaran feels that the probability of Zomato going under is just 10%.
In terms of operating risk, the company, in spite of its global ambitions, is still primarily an Indian company, dependent on Indian macroeconomic growth to succeed, and my rupee cost of capital will incorporate the country risk, he said in the blog post.
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