Zomato valuation absurd: Rakesh Jhunjhunwala

The sensational public markets debut of loss-making consumer technology startup Zomato got a royal snub from the country’s smartest and ace investor, Rakesh Jhunjhunwala. The loss-making food delivery start-up ended Day 1 (July 23) with a market cap of close to ₹1 trillion with the stock settling 65% higher to its IPO price of ₹76.

“I have learnt two important lessons [in investing]. The first lesson is what I buy is very, very important and [second] at what price I buy is most important. Good luck to Zomato. Let Zomato be worth ₹99,000 crore and Tesla be $600 billion or $6 trillion. I am not going to buy these stocks at this valuation,” said the Big Bull at a webinar organised by investment bank Equirus.

Jhunjhunwala, who runs the private equity and asset management firm Rare Enterprises, said that the problem with the technology space is always the hype around the rate of change. “Changes come but at a much slower than anticipated pace,” he said.

Disclosing that one-third of his investment is now in unlisted 14-15 companies, Jhunjhunwala said he does love the attitude of young entrepreneurs and finds their speed and devotion unbelievable, adding that what a company needs is opportunity, frugality, corporate governance, technology, and an ability to change. However, he qualified his view by saying, "The race is not ending tomorrow and I have learnt that it’s always the tortoise who is going to win the race.”

The ace investor mentioned that it was important for startups to focus on building a business model which produces cash “rather than taking father in law’s money [foreign capital] and deploying $1 billion-$2 billion as it is not capital which built big companies,” pointed out Jhunjhunwala. “Who built Zara or who built Walmart? Capital is not so important, it’s the business model," he added.

Jhunjhunwala said he has told all his investee companies that he was not interested in valuation. “I am building a business model, a cash flow model and valuations have to follow. Valuations cannot be more important than my business model and its sustainability.”

Taking a dig at investors backing startups, Jhunjhunwala said: “I think people have been far too optimistic about how fast these companies can produce cash flows.”

While acknowledging the startup entrepreneurs for their unflinching spirit, Jhunjhunwala felt the youngsters were being misguided by investors. “The focus of all this valuation is because of the money that some of these investors have made in Chinese and other companies. This according to me is madness, and just like the Tulip boom in my opinion and I have the right to be wrong. I don’t have to go to every party in town, because the hangover comes the next day,” quipped the Big Bull.

Emphasising on why he invests in companies that have sustained cash flows, Jhunjhunwala said if one were to pick names from the country’s top 25 top performing companies such as Pidilite, Asian Paints, Nestle, or Titan they have given returns over two generations. For instance, Rs 1,000 put in Nestle stock in 1987 would have fetched ₹10 lakh today. “They are not valued on the basis of earnings but based on cash flows. While the PE may be 80 times but the ratio of cash flows [price to free cash flow] has always been three-three and half times,” pointed out Jhunjhunwala.

Putting the same perspective with regards to Zomato, he said: “Today you value Zomato at ₹1 lakh crore, so when is Zomato going to get ₹3,000 crore of cash? I want to know that, and not investor cheques. History has it that right from railroads, Tulip boom, valuations have never sustained.” Over FY19-21, the food delivery startup has been showing negative cash flow from operating activities with an average negative cash flow of ₹1,635 crore.

Stating that in investing the emphasis should not be on how long it takes but how long it lasts, Jhunjhunwala quipped that this emphasis in the tech world on valuation cannot last and also took a dig at the world’ biggest VC fund, Softbank, for distorting valuations.

To justify its current valuation, Zomato will have to earn ₹4,000 crore in profit before tax, said the Big Bull, and jokingly said he hoped the company would do that before he has grandchildren!

That, in future, he would love to go short on the stock was amply clear when he said that he would wait for Zomato to make its F&O debut after it hits a market cap of ₹10 lakh crore. “Apun ko maloom hai fir kya karneka (I know what needs to be done!),” remarked Jhunjhunwala.

Despite his scepticism, Jhunjhunwala feels Zomato’s valuations are not in bubble territory. Drawing an analogy as to how George Soros waited for the opportune moment to break the Bank of England by going short in the British pound, Jhunjhunwala said, “The market will give you an indication about the weakness in price and when that happens chad jaane ka [indicating to go short in the stock].”