Financial IQ Capital Services : TRADING OF LOSS – NEW PARADIGM –
Company X accumulated losses of over Rs 4,600 Crore
Incurred Loss of Rs. 106.9 Crore in 2018
Loss of Rs. 1000 Crore in 2019
Loss of Rs. 2400 Crore in 2020
Loss of Rs. 800 Crore in 2021
Loss of Rs. 350 Crore in 3 Months Apr to June 2021
Aggregating Total Loss of Rs. 4600 Crore from 2018 to 2021 June.
With this Losses continue to mounting high, they managed to stand in their foot from 2018 till Today. Strange that it is not a Year old Business having Past years of Profit Accumulated which can set off their Present and Future Losses. Hence it is quite evident that Net loss is funded by Capital and Debt. But Why the Investors keep pumping the fund into the Startup even when they see no Profit in 4 years.
If the Business was running on Loss
Q) Were the Employee Not Paid ??
The answer is No, They were paid handsomely
Q) Were the Customer forced to Pay a high amount?
The answer is No, they were instead given Meals at a high discount
Q) Might the Founders and Top Brass was taking fewer Perks?
The answer is No,
Founder Basic Salary was Rs. 3.5 Crore
Co-Founder -Gross Remuneration was Rs. 3.7 Crore
CTO 1.5 Crore
CFO 3.26 Crore
Q) Any Income Tax
A) Since the Company was running at a loss, there is no Income Tax payable
So who was bearing the brunt of Heavy Loss ??
The answer is the Investor of X Company having a stake in the company.
It is Proved here the Loss of 4670 crores is funded by External Investor.
So Save this Word in your mind, It is the Existing Investor of X Company who is at a Loss.
Now How this External Existing Investor would gain if the Company is running a Loss ??
Now here’s the Trick, there is a Trading of Loss. What If I tell You that Loss can be sold at a Profit !!
Yes that is Possible
Investors (Top 5 Investors were holding around 50% Stake) who pumped fund into the startup has already eaten up their fund with the losses. Yet in the books they were holding Numbers of Shares and % of Stake.
VALUATION- The Talking Point
Now, The Company has gone for Independent Valuation by a Valuer.
The Valuer valued the Loss Making Company for Rs.60000 Crore !!! Strange But True.
With this Valuation, Company went for IPO that means they are going to list their Shares in Stock Market making their Shares easily accessible for all Public to Purchase and further Sale.
Strong Advertisement, Endorsement by Some Experts, News Channels, Social Media, etc created such a hype in the market of Forthcoming IPOs that it gave the feeling for any Stock Market Trader a Cake which no one going to give a miss to bite.
With such a Marketing, Valuation and Expert Endorsement, IPO got oversubscribed by whopping 38% with Listing priced at Rs 116 which was Valued at 72-76( which itself was questionable).
The interesting point was that Company X went for IPO for Rs. 9400 Crore, Out of Which only 400 Crore will only pumped into Company, Rest 9000 Crore was Part of Offer for Sale by Existing Investor. (Did anyone Noticed that Subscribing to IPO means Purchasing Shares from Existing Investor which generally People reluctant to do, as they are more interested in funding the company than buying such shares from Existing Investor.) That means out of 9400 Crore subscribe and funded by Public in the form of Rs. 116 share, the 9000 crore will go into the pocket of Early Investors.
Now here we go !!!!
Who are these Early Investors?
These are the same people who funded the loss-making Company and now they sold their stake at higher profits.
Now the Value of the Share of Early Investors, is 1010 times higher than they Purchase the share at first.
So, for 4700 Crore Loss Making Company, Everyone was Paid at a value more than worth
– Top Management
– And at Last and at a Higher rate – The Investors
So who is now Handling the Loss?
Yes, We Public holding Shares of X Company !!!
Right, The Loss has been Traded from the Top 10 Investors to Public at a Profit from 60 to 1010 times !!
This is Stock Market for You !!!!
Valuation, Media Marketing, Experts have made the Loss traded into the pocket of the Public at extremely High Value at the entrance
Now, What is the use of fundamental, Even Loss-making Companies is beating Profit yielded organizations just on the basis of Future perception which is made to be created by Environmental elements (sponsored or independent is questionable)
We see the way Stocks are traded in Stock Market are influenced by Promoted factors rather than Fundamentals and Scientific cause.
The burden of Actual loss of 4600 Crore + Now Additional Loss due to Over Valuation are into pockets of Public.
Big Bull’s View –
In a webinar organised by Equirus, Rakesh Jhunjhunwala made it clear that he is not going to invest either in Zomato or in Tesla and said that what he buys is important and at what price he buys is most important
Explaining why he won’t invest in Zomato or Tesla Rakesh Jhunjhunwala said, “There is no need to attend each and every party in the town. What I buy is important and at what price I make that buy is most important. Let Zomato market cap becomes ₹99,000 crore and Tesla market cap soar up to $600 billion or $6 trillion, I am not going to buy these stocks.”
Aswath Damodaran’s – A DIY (Do-It-Yourself) Valuation of Zomato :
Aswath Damodaran has valued the Stock at Rs 42 per share. He has mentioned the reasoning and assumptions made in his blogpost.
Concluding lines of his Article are – “I am having trouble finding a pathway to justify paying 140 INR per share, for Zomato, even with the most upbeat stories that I come up with, for the company. That may of course reflect a failure of imagination on my part, and you may be able to find a narrative for the company that allows you to invest in the company. As a trader, the question of whether you should buy Zomato comes down squarely to how good you are at playing the momentum game, knowing when to get on, and more importantly, when to get off. For you, the value of Zomato may be irrelevant, and you will need a different set of metrics (charts, price and volume indicators) to make your decisions. I wish I could help you on that front, but trading is not my game, and I have neither the tools nor the inclination to play it. I wish you the best!”
Brokerage Targets :
Jefferies : Rs 175
Credit Suisse: Rs 185
Goldman Sachs : Rs 140
Other side of the Story :
Zomato – Futuristic Food Tech Business :
Generally it is presumed that Zomato is into food delivery business. But it would be interesting to know that Income from food delivery service is not more than 10% of their revenue. So let us check the other services provided by Zomato.
Following are the types of Services :
- Food Delivery Service/Dine Out
- Subscription ( Zomato Pro)
- Advertisement Charges ( From Restaurants)
- Zomato Hyperpure (Quality Supplies to Restaurants)
- Business Consultancy ( Data related to Food preference-geographical, item-wise etc)
- Zomato Kitchen ( Cloud Kitchen)
- Zomato Whitelabel ( Custom Apps for Restaurant)
Only 8%-9% of food consumption in India is from Restaurants. Whereas the same number stands at above 40% in USA & China. So according to management there is a future scope for capturing the remaining consumers. In the contrary, there are views that considering India’s low Percapita Income, Preference for home-made food, it would be difficult for a significant growth in long run. However Growth is evident, but at a slower pace than anticipated. Average order value is around Rs 400 per order currently and is increasing at a rapid pace.
Zomato Hyperpure is a growing business segment that aims at providing best quality ingredients and kitchen products to Restaurants. And such restaurants are given “Hyperpure Inside” tag when listed on Zomato for food delivery. As this was introduced recently . So in long run based on the Cutomers response if it was found that Hyperpure restaurants are prefered more when compared to others, there would be a significant growth in this segment.
Zomato Business Consultancy has a large scope for growth. In the recent past Jubilant Foodworks(Domino’s) forayed into Biryani business with “Ekdum”. Zomato provided consultancy to Jubilant by providing data relating to No of orders placed, food preferences of Customers, timing of orders etc. In the current environment “Data is Wealth”. This would not only help in consultancy but also for Zomato to foray into new business segments. So it is expected that this segment too has significant growth opportunities.
Zomato Kitchen is a cloud kitchen where it will invite select restaurant partners to operate out of these kitchens and enable online delivery of food. This would reduce the fixed costs for the restaurants to a large extent. Currently there are brands such as Faasos, Oven Story, Lunch box which are working under this model.
Currently, Swiggy is the only major competitor for Zomato in Food Delivery Business. But off late, E -Commerce gaint – Amazon too started Food delivery service in India. Entry of Amazon at this point of time would result in a fierce competition again and in turn would result in reduction of delivery fees, additional discounts, reduction of commission charges from restaurant etc. This would again remind us the entry of Jio into telecom market. One has to wait and see who among the three would sustain in long run.
So, Valuation is not an exact science but an Art, and it depends on the assumptions taken and such assumptions vary from Individual to Individual! So, if fundamentals are considered, Zomato would not be a best choice to invest. On the other side if one believes in the future of the company based on its business model, this would be a good bet.