Zomato’s stratospheric valuation, despite the fact that it is yet to make a profit, is a testament to this
TV Mohandas Pai recalls how, in February 1993, Infosys was trying to get its IPO subscribed. Pai had not joined the company yet, but was among those keen to buy some shares. The software company, a bootstrapped enterprise set up by a group of geeks had a modest target: to raise Rs 13 crore at Rs 95 apiece at a trailing price-to-earnings multiple that was somewhere in mid-single digits. But PE players were not exactly falling over each other to get an allotment, FPIs had just started discovering India, and retail investors had no clue whatsoever about software and its uses. Enam Securities and NG Puranik, the man who spotted the stock, ultimately managed to place the last lot of shares with some investors. Among them was Morgan Stanley which picked up a big chunk of the issue; both Vinod Sethi and Madhav Dhar were convinced it was a winner. The listing—in June that year—was a low-key affair, no ringing of bells anywhere and no preening on television.
But investors made money since the stock was ruling at Rs 145 per share. But, it took a while—almost five to six years—before the analyst community started believing in the story. They had rubbished the business as a body-shopping operation, but soon realised it wasn’t a one-trick pony. As 2000 approached and the Y2K opportunity presented itself, the Street cottoned on to the idea. This was around the time that technology became a popular theme in the West; investors back home realised Infosys had a scalable business with predictable revenues, strong margins and huge opportunity.
One stockbroker recalls how the Infy management presented such a stark contrast to the rest of corporate India of the times. Here was a set of unassuming, highly-qualified and driven youngsters, setting out to build a global business without billions of dollars of PE capital. From giving guidance to furnishing detailed information on the business, Infosys was a trendsetter; its mantra was to under-promise and over-deliver and that soon made it the darling of the Indian stock market. If anyone earned a P/E multiple the clean way, it was Infy. The stock has created history and wealth of the kind few have others have; a market cap of around Rs 40-45 crore has become Rs 6.7 lakh crore.
The conservatism of the past has given way to a more accommodating and open mindset. In the internet age, what has changed dramatically is the way in which businesses are valued; promoters are cut a lot of slack in the belief that the business model is a promising one and that it will turn profitable sometime in the future. Nothing else can explain the stratospheric valuation that Zomato commands, of a whopping Rs 60,000 crore when it doesn’t make one naya paisa of profit. To be sure, consolidated losses narrowed to Rs 822.27 crore in FY21 from Rs 2,363 crore in FY20, with expenses shrinking. However, revenues from operations declined to Rs 1,994 crore in FY21 from Rs 2,605 crore in FY20, the company’s red herring prospectus filed with SEBI showed. Albeit the fact that there were disruptions, one would have expected revenues last year to have been better. It is true online transactions in India are galloping and, therefore, the volume of business—across use cases—transacted on the internet, too, will grow exponentially. However, how much of the pie each player is able to get is another matter altogether. At the end of the day, one rule of the market won’t change: A great company must make great profits.