Zomato Fairly Valued or a Bubble Waiting to Burst

Summary

Zomato !! Everyone's favourite food delivery app... or is it just a really good story we're all buying into? With a PE ratio that's sky-high and whispers of being a one-rupee stock, are we retail investors about to get served a dish of overhyped disappointment?"

Zomato is an Indian restaurant aggregator and online food ordering platform owned by Eternal Limited. It was founded by Deepinder Goyal and Pankaj Chaddah in 2008. Zomato provides information, menus and user-reviews of restaurants as well as food delivery options from partner restaurants in more than 1,000 Indian cities and towns.

Zomato's Buzz on Overvaluation :

Food Delivery Market in India :

The online food delivery market in India is experiencing rapid growth, driven by increasing digitalization, rising internet and smartphone usage, and changing lifestyles1. The market is projected to reach US$ 43.47 billion in 2024 and is expected to grow to US$ 265.12 billion by 2033, with a CAGR of 18% to 22.25% from 2025 to 2033. 

The major players in the Indian online food delivery market include Zomato, Swiggy, Jubilant Foodworks Ltd., Yum Brands Inc., Uber Eats, Dominos, and McDonald'sZomato and Swiggy have emerged as the dominant players, acquiring local players to expand their reach.

Key Drivers of Growth :

• The increasing use of smartphones and affordable internet access is enabling more people to order food online. India had over 624 million smartphone users in 2021, and this number continues to rise.
• Busy urban lifestyles and a preference for convenience are driving the demand for online food delivery. The growing working population and increasing disposable incomes also contribute to this trend.
• Online food delivery offers convenience and a wide range of cuisines, attracting a diverse customer base.
• Major companies are using marketing strategies and discounts to further fuel market expansion.
• Zomato's acquisition of Blinkit shows the growing importance of quick commerce in the food delivery market.
• Quick commerce is expected to add to the woes of high operating losses with the quick commerce market becoming incredibly competitive.

Zomato’s IPO

Zomato's IPO was a public offering of 9,375 crore rupees that was listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) on July 23, 2021. The IPO was a combination of a fresh issue and an offer for sale from shareholders. 

Zomato intended to use the proceeds from the fresh issue of shares for acquisitions, funding growth initiatives, and general corporate expenses2. 75% of the ₹7,500 crore proceeds were intended for organic and inorganic growth opportunities4. 40% of these funds were to be used for organic growth initiatives, such as improving delivery infrastructure, customer acquisition, and building tech capabilities, with the remainder for inorganic acquisitions.

After its IPO in July 2021, Zomato's stock experienced a volatile journey. The IPO price was ₹72-76 per share14. The shares opened with a significant premium of 52.6% and continued to rally, reaching an all-time high of ₹160.3 apiece in November 20211. However, this was followed by a sharp decline of 74% to ₹41.65 per share within eight months

What led to Zomato's stock price dropping so significantly after its IPO?

A major reason for the stock's decline was the expiration of the mandatory one-year lock-in period for pre-IPO investors, including promoters, employees, and other shareholders14. This led to a massive sell-off as these investors were then free to sell their shares Following the end of the lock-in period, major investors like Tiger Global Management and Uber Technologies Inc. divested their stake in Zomato, further contributing to the stock's decline

Zomato reported an increased net loss in FY22, despite a doubling of revenues. The company's EBITDA loss was also higher compared to the previous year

Zomato's acquisition of quick commerce startup Blinkit also led to a severe beating of the company’s stock.

What are the main challenges faced by food delivery companies in India

A Look into Zomato's Valuations :

Profit & Loss statement 

• Zomato's P&L statement evidences a historically poor financial condition, with ongoing operating losses and net losses across FY19-FY23.
• Even as the company has registered strong revenue growth, negative operating profits and high expenses have burnt shareholder wealth. The company only became profitable in FY24 but after years of deep losses.
• The negative EPS in past years indicates poor earnings ability, rendering the stock unappealing to value investors.
• The inconsistent profitability is a cause for concern regarding the sustainability of its business model, particularly in a low-margin business such as food delivery.
• The high volatility in P/E ratio also indicates valuation uncertainty, rendering it a risky bet for investors.
• If Zomato is unable to sustain profitability, it will face dilution viafundraises or cost-cutting initiatives that can hurt growth, causinginvestor doubts and possible stock underperformance in the long term.

The financial ratios indicate that Zomato is significantly overvalued, as seen from its extremely high P/E ratio, EV/EBITDA, and Price-to-Book Value. Here’s what these ratios suggest:

1. P/E Ratio :The Price-to-Earnings (P/E) ratio tells us how much investors are willing to pay per ₹1 of earnings. A P/E of 140.2 is extremely high, indicating that the stock is trading at a massive premium.

• This suggests overvaluation, as the market has priced in high future growth expectations, despite past losses.

2. EV/EBITDA : Enterprise Value to EBITDA measures how expensive a company is relative to its earnings before interest, tax, depreciation, and amortization.

• A value of 45.7 is very high, meaning the company’s core earnings do not justify its current valuation.

3. Net Profit Margin : Net Profit Margin shows how much of the revenue is retained as profit after all expenses.

• A margin of 20.7% is decent, meaning Zomato has started becoming profitable, but this alone does not justify the valuation.

4. Revenue Growth YoY (64% - Low)

• Year-over-year revenue growth of 64% seems strong, but in the startup phase, such high growth was expected.
• If this slows down in the future, the stock could face heavy corrections.

5. Net Profit YoY (-57% - Low)

•  A negative 57% YoY net profit growth means profits have shrunk, which is a worrying sign, especially when a company is valued so highly.

6. Intrinsic Value vs. Share Price (Overvalued)

• The intrinsic value as of February 19, 2025, the estimated intrinsic value of Zomato stock was between ₹52.79 and ₹2.00 and current market price is ₹223.25.
• This suggests that the stock is trading extremely high compared to its fair value, but with such high ratios, there is a risk of correction if earnings don’t improve.

7. Price-to-Book Ratio (6.95 - High)

• The P/B ratio tells us how much investors are paying relative to the company’s book value (assets minus liabilities).
• A P/B of 6.95 is high, meaning the stock is trading at nearly 7 times its book value, which is excessive unless future growth justifies it.

Conclusion 

Zomato's valuation ratios and financials evidently show that the stock is extremely overvalued, as its P/E, EV/EBITDA, and Price-to-Book are veryhigh. Although the company has witnessed robust revenue growth and has become profitable in the recent past, its past losses, uneven net profit growth, and high market expectations render it a risky investment. The price of the stock is currently being influenced more by potential growth than by fundamental strength, and thus it issusceptible to corrections if growth tapers off or profitability erodes. Investors need to be cautious since sustained profitability and efficiency gains are essential to support its valuation in the long term.