NEW DELHI: Shrugging off concerns over ‘sky-high’ valuations, India’s first unicorn debutant on Friday made over 80 per cent listing gain.

While many analysts questioned the food aggregator’s valuations at Rs 65,000 crore, the stock breached the market cap of Rs 1,00,000 crore within 10 minutes of trade.

“Conventional wisdom does not work with the internet companies,” head of research at a leading domestic brokerage said.

A few brokerages had said the IPO was good only for listing gains. The stronger-than-expected response to the stock suggests investors think otherwise.

Zomato’s strong listing gains came at a time when the online food aggregator is still incurring losses despite having captured a huge market. The company may continue to make losses in the foreseeable future, it said in its IPO papers.

The question now moves to how soon will Zomato turn around, given the valuations the internet company is commanding after the listing.

ICICI Securities said similar pessimism was witnessed in the US about 20-25 years ago as in the Indian market today around ‘near-term’ profitability, cash flows and valuations.

It gave the example of Amazon where US’ sell side analysts based on reverse DCF model concluded the US-based company had to sell practically every book on earth for its market cap to be justified.

The stock got listed in 1997. Since then, its market cap has zoomed 240 times. That without a proportionate increase in the number of books or population or earth-like planets!

What went wrong then?
Under-estimation,said ICICI Securities. “Under-estimation of the strength of business models, steady state profitability and / or over-estimation of valuations – in case of Google, Apple and Amazon – has been a key regret for Berkshire Hathway (elaborated in annual letters). Post dot com bust, many US analysts called out multiple false-positive tech bubbles. Nevertheless, the weightage of tech firms in S&P500 increased from mid-single digits during 1990s to 28 per cent today. US tech is now worth more than the entire market cap of Europe,” it said.

The question that arises now is: Can Zomato be the one?

“The prerequisite for Zomato to create long-term gains for investors would be the company’s ability to anticipate demand trends before somebody else is there. Zomato needs deep pockets, which they have. But they need more money going ahead if they want to be all-encompassing. They need predictive ability and more experienced skills,” said Deepak Jasani of HDFC Securities.

Jasani said a domestic digital company doing a Amazon on a global scale is a tough, if not impossible task.

On whether Zomato can replicate Amazon’s stock success, Jasani said: “Investors are adapting to new realities. They would surely show some patience for some time. But how long, it is to be seen,” said he.

ICICI Securities sees the likelihood of ‘some’ Indian companies evolving like US firms over the next decade. It said while the technology sector accounts for 17 per cent of Nifty50 today, its share may increase disproportionately as some of these IPO companies can be key contenders for its immediate addition to Nifty50 (& MSCI).

“Historically, customer adoption in most new product categories took longer time of 15-25 years before it gained critical mass and companies became profitable in their respective businesses. In contrast, we find category adoption of some of the segments such food-tech, payments and e-commerce to be very encouraging despite their limited history of existence. For instance, we estimate healthy 16 per cent food-tech adoption outside the urban core (Next-500 towns) despite hardly 2 years of presence of Zomato/Swiggy,” it said.

ICICI Securities said rich valuations of internet companies globally surprised value conscious investors including likes of Warren Buffet from time to time.

“The valuation premia can be partly explained by the adjacent optionality (sometimes non-linear), which is difficult to be captured in a reverse DCF,” it said.

Sandip Sabharwal of asksandipsabharwal.com said Zomato’s subsequent performance would depend on how the company actually delivers and at what pace it reduces losses because once it becomes a public company, continued losses are not taken as well as when you are a privately-owned company.

“That will be the challenge for the company but that is the story for some time later,” he told ET NOW.

While profitability and cash flow are great sanity metrics, they are better applied on businesses in steady state such as Infosys, Google and HUL, the brokerage said.

“For now, we look for promising unit economics and contribution margins before marketing overheads,” ICICI Securities said.


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