On Valuing Zomato, But Don’t Stop There

If you are a student of economics, you should be able to understand the basics of valuation. It is up to each one of us to determine our level of expertise, but at the very least, we should be able to understand valuations that others have arrived at.

And a great way to learn this is to devour, as greedily as possible, every single blog post written by Professor Aswath Damodaran.

Here’s an excerpt from his blogpost on valuing Zomato:

Eating out and prosperity don’t always go hand in hand, but you are more likely to eat out, as your discretionary income rises. Thus, it should come as no surprise that the number of restaurants increases with per capita GDP, and that one reason for the paucity of restaurants(and food delivery) in India is its low GDP, less than a fifth of per capital GDP in China and a fraction of per capital GDP in the US & EU.

http://aswathdamodaran.blogspot.com/2021/07/the-zomato-ipo-bet-on-big-markets-and.html

Read the whole thing, and if it is your first time reading about this topic, read it three times. I’m quite serious! Also download the spreadsheets, and play around with the assumptions in them. It is a great way to teach yourself Excel and valuations at the same time. Excel and valuations is also a great way to understand the concept of complementary goods, and I’m only half joking.


So, ok, you have now got a little bit of a grip on valuation. That’s great, but you shouldn’t stop there. Valuing a company is fine, but how does one think about the valuation of this company (Zomato) in the context of this sector (online food delivery)?

Here are some facts. Zomato raised $1.3 bn through an IPO which was oversubscribed 38 times and which valued it at $14.2 bn. At about the same time, its competitor Swiggy raised $1.25 bn in a Series J fund raise which gave it a post-money valuation of $5.5 bn.
The post-IPO public market price discovery of Zomato shows that Swiggy is 2.6 times under-valued.

https://gulzar05.blogspot.com/2021/07/some-observations-on-zomato-and-swiggy.html

Also from that post, a great way to understand how to start to think about the price one can get in the market. That is, you can learn all the theory you want about valuation, and pricing and what not. At the end of the day, the price you command in the market is about so much more than that:

4. But, if markets stay as frothy as it’s now, Swiggy’s promoters and investors need not worry. Unlike Zomato’s promoters who, judging from the first day pop left huge money on the table, Swiggy’s promoters could rake in much more by pricing its IPO closer to the comparator market price. Swiggy and other could benefit from the later mover advantage.
5. There appears to have been a first mover disadvantage for Zomato in leaving money at the table and not maximising its IPO takings. Conversely there may have been a first mover advantage for its investors in maximising their returns.

https://gulzar05.blogspot.com/2021/07/some-observations-on-zomato-and-swiggy.html

And you shouldn’t stop there either! Valuing a company is fine. Thinking about that company in the context of its competitors is great. Thinking about the IPO rush in the start-up world, and what it means in the context of the overall economy is fantastic.

The Indian startup scene has been set ablaze by the spectacular IPO of Zomato. In a largely conservative market this constitutes a huge collective leap of faith since the company has consistently made increasing losses and several questions hang on its profitability. With some more blockbuster IPOs lined up, the party is likely to go on for some time. Some high-profile boosters even think of it as a new dawn in risk capital raising. The problem is with those left standing when the party ends, as it must. And it’s most likely to be not pretty.

https://gulzar05.blogspot.com/2021/07/the-startup-ipo-bubble-reaches-india.html

The world’s unicorn herd is multiplying at a clip that is more rabbit-like. The number of such firms has grown from a dozen eight years ago to more than 750, worth a combined $2.4trn. In the first six months of 2021 technology startups raised nearly $300bn globally, almost as much as in the whole of 2020. That money helped add 136 new unicorns between April and June alone, a quarterly record, according to cb Insights, a data provider. Compared with the same period last year the number of funding rounds above $100m tripled, to 390. A lot of this helped fatten older members of the herd: all but four of the 34 that now boast valuations of $10bn or more have received new investments since the start of 2020.

https://www.economist.com/business/2021/07/19/technology-unicorns-are-growing-at-a-record-clip

Why is this happening now? Is it because of loose monetary policy the world over? Is it because of optimism about what the world will look like post-covid? Neither, and something else altogether? Or both and something else also? What might the ramifications be? How should that influence your thinking about the next three to five years in your life – when it comes to going abroad to study, or starting an MBA, or being in the job market?

Note the chain of thought in this blogpost: valuing a company, thinking about that specific sector, thinking about IPO’s in general, thinking about the overall economy… and getting all of that back to your life. Apply this to all of the news you read, everyday, and you’ll soon start to build your own little picture of the world. That is, you’ll start to see the world like an economist. And trust me, that is a superpower. 🙂

EC101: Links for 20th June, 2019

  1. “One needs to be cautious in these type of businesses trading at higher multiples as slip in any one of the parameters – decline in sales and profit growth, build up of debt, deterioration in working capital, capital misallocation – wrong acquisitions and expansions will lead to derating of the stock quickly. The company has shown no signs of these as of now and investors need to keep a close look at these.”
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    A vastly under-rated skill among economics students. The theory of (and in this case also the application of) reading a balance sheet. Read this article to get a sense of how to read one – and in an ideal world, try to write a similar article about a firm of your choice.
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  2. “In other words, to quote Simon, “so long as the rate of interest remains constant, an advance in technology can only produce a rising level of real wages. The only route through which technological advance could lower real wages would be by increasing the capital coefficient (the added cost being compensated by a larger decline in the labor coefficient), thereby creating a scarcity of capital and pushing interest rates sharply upward.” In other words, the price of capital would have to rise by more than the price of consumption.”
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    Under what circumstances will advances in technology cause the real wage rate to go down? The vastly under-rated Herbert Simon provided an answer to this question way back when – read this article to find out its rediscovery.
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  3. “Now that the crisis is in the rearview mirror and the current expansion is nearing the longest on record, is it possible to go back to having a balance sheet as small as in 2007? The answer is no. The amount of currency in circulation has grown so much that it is not possible to shrink the balance sheet to its earlier size. This is good news because it reflects a growing economy. The larger balance sheet also reflects banks wanting to hold more reserves at the Fed. Banks partly hold these highly liquid and essentially risk-free assets to meet new liquidity regulations designed to improve the resilience of the overall financial system.”
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    A short, but useful essay about the huge expansion to the Federal Reserve’s balance sheet, and why it is unlikely to shrink anytime soon. A useful read for students of monetary economics.
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  4. “The correlation phrase has become so common and so irritating that a minor backlash has now ensued against the rhetoric if not the concept. No, correlation does not imply causation, but it sure as hell provides a hint. Does email make a man depressed? Does sadness make a man send email? Or is something else again to blame for both? A correlation can’t tell one from the other; in that sense it’s inadequate. Still, if it can frame the question, then our observation sets us down the path toward thinking through the workings of reality, so we might learn new ways to tweak them. It helps us go from seeing things to changing them.”
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    The phrase is burned onto my brain, as it is for everybody else who ever attended a statistics class. “Correlation is not causation” Sure, it isn’t – but this article warns us against the over-use of this phrase, and how it might have ended up making us not think deeper.
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  5. “The Baumol effect reminds us that all prices are relative prices. An implication is that over time prices have very little connection to affordability. If the price of the same can of soup is higher at Wegmans than at Walmart we understand that soup is more affordable at Walmart. But if the price of the same can of soup is higher today than in the past it doesn’t imply that soup was more affordable in the past, even if we have done all the right corrections for inflation.”
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    A short, but very readable interpretation of the Baumol effect – and as this excerpt makes clear, also a great reminder of the fact that all prices, everywhere and always, are relative.

Tech:Links for 18th June, 2019

  1. “”I did my first valuation of Tesla in 2013, and undershot the mark, partly because I saw its potential market as luxury cars (smaller), and partly because I under estimated how much it would be able to extract in production from the Fremont plant. Over time, I have compensated for both mistakes, giving Tesla access to a bigger (albeit, still upscale) market and more growth, while reinvesting less than the typical auto company. In spite of these adjustments, I have consistently come up with valuations well below the price, finding the stock to be valued at about half its price only a year ago. This year marks a turning point, as I find Tesla to be under valued, albeit by only a small fraction. Even in the midst of my most negative posts on Tesla, I confessed that I like the company (though not Elon Musk’s antics as CEO and financial choices) and that I would one day own the stock. That day may be here, as I put in a limit buy order at $180/share, knowing fully well that, if I do end up as a shareholder, this company will test my patience and sanity.”
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    The forever excellent Aswath Damodaran on his latest valuation of Tesla, and now he even has skin in the game. If you want to understand how to value a company, you can’t do better than Prof. Damodaran, and if you want to begin with a particularly challenging, but inevitably interesting company, you can’t do better than Tesla. For both of these reasons, worth reading in some detail.
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  2. “Since it began operations in 2010, Uber has grown to the point where it now collects over $45 billion in gross passenger revenue, and it has seized a major share of the urban car service market. But the widespread belief that it is a highly innovative and successful company has no basis in economic reality.An examination of Uber’s economics suggests that it has no hope of ever earning sustainable urban car service profits in competitive markets. Its costs are simply much higher than the market is willing to pay, as its nine years of massive losses indicate. Uber not only lacks powerful competitive advantages, but it is actually less efficient than the competitors it has been driving out of business.”
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    Speaking of tech and automobile companies, this article is an extremely bearish take on Uber – with fairly convincing reasons to boot. A very long, but ultimately very convincing (and depressing) read. The party ought to end soon.
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  3. “Uber also has a very limited ‘network’ effect, because drivers can and do jump to whatever platform offers them the best terms – indeed most Uber drivers use all available platforms, and they accept rides from the platform offering them the highest rates – and customers can do the same (most customers have multiple ride-hailing apps on the phones, and can easily choose the cheapest). This means that even if Uber survives, it will likely always remain an extremely low margin business.”
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    Another take on the same issue – I don’t necessarily agree with all the economic arguments made in the piece – for example, I think the cost of owning a car as opposed to hiring one for a drive is under-emphasized – but the broader conclusion is all but inevitable.
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  4. “The Tesla position would presumably be that the addition of LIDAR would not have materially avoided the car accident and loss of lives, but this is going to be tough to showcase since in theory any use of LIDAR is going to incrementally improve the safety odds, assuming it is used wisely, and so it’s another part of the uphill climb by Tesla to avoid getting summarily dinged for their lack of LIDAR.They also cannot make the argument that they did not know about LIDAR or were somehow unaware of it, which is quite obviously not the case, including that their self-offered anti-LIDAR rhetoric acting as their own admission that they knew about LIDAR and made a deliberate decision to intentionally exclude it.”
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    Read this article to get a sense of what LIDAR is, and why it is important (or not) in the world of autonomous driving – but also read this article to get a sense of how cost-benefit arguments work in the real world, along with a great way to understand opportunity costs.
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  5. “Americans associate electric cars with the luxury of Tesla, the unrivaled conveyance of choice for the Sand Hill Road set. But these newly assembled vehicles, part of a family of SUVs called the Tang that retails from about 240,000 yuan ($35,700), are aimed squarely at middle-class drivers in the world’s largest electric vehicle market, China. Their manufacturer, BYD Co., is in turn the No. 1 producer of plug-in vehicles globally, attracting a tiny fraction of the attention of Elon Musk’s company while powering, to a significant extent, a transition to electrified mobility that’s moving faster in China than in any other country. Founded in Shenzhen in the mid-1990s as a manufacturer of batteries for brick-size cellphones and digital cameras, BYD now has about a quarter-million employees and sells as many as 30,000 pure EVs or plug-in hybrids in China every month, most of them anything but status symbols. Its cheapest model, the e1, starts at 60,000 yuan ($8,950) after subsidies.”
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    Uber, Tesla, sure. But have you heard of BYD? Or put another way, China had to come up sooner or later.