To Order or not!

There’s immense buzz around all of us with regard to Zomato’s ongoing public issue and hence, the blog is here.

There are a few aspects my friends have gotten excited about. One is that the price band is very cheap at 72-76 per share. This makes them believe that it’s a good bet. Second, with Amazon and Google valued at what they are, no-one wants to be left behind in this potential get rich quick IPO.

Firstly, price per share is a simple yet stupid way to identify if a share is cheap or not. The key is market capitalisation. Different companies have different equity capital based on which they issue total number of shares. BSE has an equity capital of 9 crores, made up of 4.5 crores shares of rs 2 each while IOC has an equity capital of 10000 crores approx, made up of 1000 crore shares of rs 10 each. So the per share value will signify different level of ownership. Holding 1000shares of BSE will obviously give you more ownership than holding 1000 shares of IOC.

Zomato is raising close to 9375 crores at a market cap of close to 60000crores. So at 72rs per share, it is issuing close to 833 crores shares and thus, you can calculate your ownership levels. So, never judge a company by price of its share. Dig deeper and look for balance sheet.

Second, it’s a loss making machine. To generate 2000crore in sales, it needs 2850 crores in capital. This is insane. The company says it is not looking to get profitable anytime over next 5-10 years. This basically means, it’s selling something worth rs 2850 for rs 2000, by funding the gap between the two by somebody’s money. That someone used to be venture capitalist until the ipo and now it’s going to be your money! So choose yourself if you want to forever fund a loss making venture with no returns except how Bitcoin works- the hope that it will go up in price and you can sell it to someone more dumb. Well, like I say, that is not investing. It’s called speculation.

For 2000 crores of sales, HDFCAMC generates over 1600 crores of profit( ebitda) and 1200 crores of net profit. That’s a business I’d be happy to own. So, with no profits in sight, I don’t think investors can see anything but losses all over them while the promoters bask in glory and media coverage.

So does this mean all potential startups are bad? Nopes. Look for businesses catering to niche groups which can later be scaled up significantly and need no discounts to grind growth. There is no difference between swiggy, Zomato or dunzo. A customer will order from whichever app offering more discount. I do that myself. So these businesses are like airline companies. They have growth, scalability and repeat customers. They however are best wealth destroyers. They never make sustained profits, if they make any.

So choose your companies well. Find out why do you want to own what you do. And if it’s just a long bet on- oh this might be the next Amazon, god bless you.

There’s one more significant problem public investors are going to face with such companies. The private equity has already bought them at infancy and have made 100x their money before dumping them onto public with no potential growth in sight. So with 60000 crores market cap, do you really believe Zomato can double without any profits? The analogy with Infosys or Amazon is wrong as they never raised money from private equity. Infosys was valued at 30 crores at its ipo in 1992 and now is worth over 4lakh crores.

So I’m not looking to order Zomato anytime soon, unless it’s from a restaurant I like! Rest, it’s your money!!