For years now, Indian investors who were shut out of the private capital markets have watched in awe and disbelief at the billions of dollars being poured into loss-making internet firms.
But with the Zomato IPO (initial public offering) opening the doors for public market investors to invest in these firms, it’s now the turn of private market investors to watch in awe and disbelief.
Zomato is trading at a 65% premium over its IPO issue price, giving it a valuation of $14.2 billion. Note that its close competitor, Swiggy, was recently valued at less than two-fifths those levels, or $5.5 billion, after a $1.25 billion fundraise in the private markets.
The clear message is that public market investors, drunk with liquidity, are now far more imaginative about the promise and potential of internet firms than their counterparts in the private capital markets.
In fact, until the IPO, the two firms were neck-to-neck in terms of valuations. A $156 million fundraise in the first half of 2020 had valued Swiggy at $3.65 billion. Soon after, Zomato raised $660 million at a $3.9 billion post-money valuation. On a pre-money basis, Zomato was always valued lower compared to Swiggy—until this year.
The stark difference in valuations between the similar-sized food delivery platforms puts on display the widening gap between public and private market valuations post the pandemic.
While private market investors have turned cautious, public market valuations have exploded. Data firm Pitchbook says the average EV/Ebitda valuation multiple for US private equity (PE) deals stood at 13 times in the 12 months till June 2021. At the end of March 2020, this measure stood at 15.2 times. In the case of the S&P 500, the EV/Ebitda valuation multiple has risen from around 15 times before the pandemic to around 19-20 times.
While public market valuations are being driven by highly positive sentiment and momentum trades, private market investments tend to be relatively more considered and careful.
This wide disparity in valuations is even causing many PE firms to exit through an IPO process. “With multiples now substantially higher in public markets, PE firms have been more aggressive in listing portfolio companies,” said a report by Pitchbook earlier this month, adding that 2021 is set to be a record year for listings.
In the case of Zomato and Swiggy, the contrast is far higher. An October 2020 valuation report filed by Swiggy, which had liberal assumptions such as the firm turning free cash flow positive from this fiscal, had valued the firm’s equity at less than $3 billion. The valuation, done using the discounted cash flow method, had also assumed free cash flow would rise at a rate of 100% annually between fiscal 2022 and 2027. On a pre-money basis, both firms were valued at $3.3-$3.5 billion in recent funding rounds at the time.
For investors to now suddenly conclude that Zomato should be valued about four times higher is strange, to say the least.
Aswath Damodaran, an expert on valuation, puts a value of $5.25 billion on Zomato, based on assumptions that are “upbeat on growth and profitability”, to use his words.
Also note that at current prices, Zomato is valued at over 20 times estimated revenue for fiscal 2023. This is more than three times the average valuation of global food delivery firms. Swiggy’s valuations are only slightly higher than the global average, in comparison.
Of course, just like private market investors have made mouth-watering returns on their bold bets with Zomato, it’s entirely possible that the growth of the food delivery firm lives up to the far higher expectations of public market investors. But as Damodaran warns, high growth can attract higher competition, and with Amazon waiting in the wings, return expectations may need to be toned down a bit.