Variations in Valuation – the Zomato Story


This is not only a case that witnessed a great divide among the valuators but also a case where the public’s expectations have toppled the rational fundamentals of stock valuation.

The valuation (1)for Zomato’ s IPO was expensive at 25 times FY21 enterprise’s value to sales compared to an average of 9.6 times for global peers and 11.6 times for Indian quick-service restaurants (QSRs). According to Aswath Damodaran (2), who is considered as the dean of valuation, the imaginations of many investors have run riot creating a fairy tale valuation of Zomato. He valued Zomato’s share at ₹41 (corrected it from the initial ₹ 40 per share) which is only 53 % of its issue price of ₹ 76. The share on its debut at NSE (3) at one point surged to ₹ 138.90 finally closing at ₹128.85, registering a rise of 65.6 % on the opening day.

No Profit, Only Promise

There are another couple of things that make it more interesting. First, the company ventured an IPO without recording even a single rupee of profit. It incurred loss (4) of ₹ 816.42 crore in fiscal 2021, ₹ 2,385.60 crore in fiscal 2020, and ₹ 1,010.51 crore in fiscal 2019.Second,with stiff competition from Swiggy (5),which just got funding of₹3400 crore from Soft Bank, and Amazon getting into the food delivery (6), Zomato has an uphill task ahead. Though Zomato did relatively well during the pandemic due to restrictions on public restaurants, it will have its own challenges as the curbs are being removed.

“Absurd” Valuation

Ace investor Jhunjhunwala (7) called Zomato’s valuation ‘absurd’. He identified the core of the problem as overestimation of speed with which people expect change in the technology space. Though changes are certain they come at a speed lower than anticipated. He opined that focussing on the customer than burning cash is the key to growth. According to him the money that some of these investors made in Chinese and other companies is driving their optimism and valuations of this kind will not sustain in the long run. To justify its current valuation, Zomato will have to earn ₹4,000 crore in profit before tax, which is difficult to see in the near future.

The Valuation Spread

Prof. Damodaran (8)conducted an experiment using a spreadsheet to let people insert their own valuations and got a range of 0 to ₹567. He explains that valuation is based on expectations of future earnings which are quite subjective. Assuming that food delivery market in India could reach $40 billion in 10 years, and that Zomato would get a 40% share of this, he estimated the value of equity to be ₹ 394 billion, deducing it to ₹ 41 per share. For a company that has less than ₹ 20 billion revenues, this estimation looked too farfetched, and hence few valued it for much less than ₹ 41.

The Expert’s Opinion

As Prof. Damodaran explains, for valuation, established companies have numbers to speak while start-ups have stories to tell and sell. Zomato’s asset-light scalable business model, the scope for target market expansion, first-mover advantage in the food delivery business, was a narrative of possibility that helped its high valuation in the market. Zomato being the first start-up in the Indian food aggregator space to be listed on the exchanges, and being the first unicorn in the space, drew tremendous enthusiasm among the investors. 


And of course, in a traders’ game, traders always have reasons to remain optimistic. The outlook of Indian investors on the company’s potential to enhance its earnings also reflects the macro expectations about the overall market (9)as well. All said and done, investing is about finding stocks that are differently valued from our own and deciding to buy or sell.

Learners’ Opportunity

Business valuation has to be tempered by the exercise of judicious discretion and judgment. To know more, check out @

Discussion Questions

Do you think IPO is a good option for start-ups to raise funds? Why?

Source Articles

1. Sultana, Narsin. Analyst wary of Zomato IPO’s Big Valuation. July 14, 2021.

2. Raj, Subham. Zomato valuation enigma! The crowd values it between 0 & Rs 570. The Economic Times. August 5, 2021.

3. Parkin, Benjamin. Zomato soars to $12bn valuation on Indian market debut. Financial Times. July 23, 2021.

4. News. ‘Will provide food at 40% discount with only Rs 3,000 cr loss’: Harsh Goenka takes swipe on Zomato IPO. Business Today. July 17, 2021

5. Bose, Shreya. Swiggy Becomes India’s Biggest Food Startup At Rs 42,000 Cr Valuation; Rs 3400 Cr Softbank Funding Approved. July 13, 2021.

6. Shrivastava, Aditi. Amazon launches food delivery service in India. The Economic Times. May 22, 2020.

7. Keshavdev, V. Zomato valuation absurd: Rakesh Jhunjhunwala. Fortune India. July 24, 2021.

8. Damodaran, Aswath. A DIY Valuation Of Zomato. BloombergQuintOpinion. August 4, 2021.

9.Damodaran, Aswath. The Zomato IPO: A Bet on Big Markets and Platforms! . July 22, 2022.

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