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FM - Pre Reading Assignment - 2018B1A40560H

This document provides a summary of two articles - one on bond valuation regarding SBI raising funds through AT-1 bonds, and another on equity valuation analyzing Zomato's IPO share price. It also summarizes a YouTube video by valuation expert Aswath Damodaran where he reviews his initial valuation of Zomato pre-IPO. Damodaran valued Zomato's shares at Rs. 41 but they were trading at Rs. 138. He discusses feedback received and walks through the key determinants in his DIY valuation model for Zomato like total addressable market, market share, revenue slice, operating margins, and reinvestment rates.

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Aditya Shukla
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31 views

FM - Pre Reading Assignment - 2018B1A40560H

This document provides a summary of two articles - one on bond valuation regarding SBI raising funds through AT-1 bonds, and another on equity valuation analyzing Zomato's IPO share price. It also summarizes a YouTube video by valuation expert Aswath Damodaran where he reviews his initial valuation of Zomato pre-IPO. Damodaran valued Zomato's shares at Rs. 41 but they were trading at Rs. 138. He discusses feedback received and walks through the key determinants in his DIY valuation model for Zomato like total addressable market, market share, revenue slice, operating margins, and reinvestment rates.

Uploaded by

Aditya Shukla
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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FIN F315

FINANCIAL MANAGENEMNT
NAME: ADITYA SHUKLA
ID: 2018B1A40560H
DATE: 9 Sept 2021
Pre-reading on Valuation of Bonds and Equity

Bond Valuation: SBI raises Rs 4,000 crore via AT-1 bonds at 7.72% coupon rate -
The Financial Express

Summary: This article talks about the state-owned bank SBI and how it is raising funds of about Rs.
4000 crore through bonds. The demand for these AT1 bonds or Additional Tier I bonds was more than
expected by SBI when they issued them in the bond market.

The article explains that AT1 bonds are a type of unsecured, perpetual bonds issued by the banks to
increase their core capital base in order to meet the new Basel III norms. The AT1 bonds issued by SBI
had excellent ratings of AA+ from the local rating agencies.

AT1 bonds are used by banks to raise funds by tapping into the overseas debt market. SEBI has also
changed the valuation rules for perpetual bonds. And the deemed residual maturity of Basel III AT-I
would be 10 years, 20 years, 30 years, and 100 years according to the time frame in which they are issued.

Equity Valuation: Zomato shares overpriced? Valuation guru Aswath Damodaran estimates the
true value at Rs 41 only - The Financial Express

Summary: The article talks about the overpriced Zomato share and also gives its opinion about the
famous Valuation ‘Guru’ Aswath Damodaran’s Base case in which he performed his valuation on Zomato
ahead of its IPO release. He valued the share price to be Rs.41 per share. However, Zomato’s currency
market price is about to hit Rs. 138.

Many forums gave their opinions on Aswath’s valuation. Some of them said that it was undervaluing by
him as he was undermining Zomato’s ability to enter new markets like cloud kitchen and grocery delivery.
Some said that his valuation lacked some elements of cash flows leading to its lower value. He assumes
that there will be only 3 big players in the food delivery market in the next 10 years. Then Zomato is
expected to have a fair share of 40% of that market. He derives that value to be close to Rs. 39,400 cr
which translates to Rs. 41 which is very less and hence people paying Rs.70-75 for the Zomato stock are
buying it at an inflated rate.

Video for the above article: (160) Zomato.. Zomato... A DIY Valuation of Zomato - YouTube

In this video, Aswath reviews his analysis of Zomato’s valuation. He gives his opinion as to the Feedback
he received from various stock market forums and experts about his Base Case valuation on the company.
He explains the difference between a ‘Good Company’ and a ‘Good Investment’. He also explains that
Investing is about finding the mismatches between your views on a company V/S what are the Market
opinions on that company. This he talks as a Mismatch Test A Good investment according to him is
when you think that the future is going to be good for a company and the Market says it is going to
okayish. A Bad investment is when you think not good enough about the future of the company but the
market is having sky-high expectations for it.

For investing to be a healthy practice, we must take ownership of our investment decisions. One should
not buy a stock simply because others are buying it too. Your decision must come from your assessment
of value.

Steps to value a Company…


● Develop a narrative for the business
● Test the plausibility of the company’s future business story that you created
● Convert the story to drivers of value
● Create a model to find the intrinsic value by feeding these drivers of value and the numeric value
they hold into this model.
● Feedback Loop: After valuation is done at your end always keep the discussion channel open for
reviews, feedback, and opinions about your valuated price and the process used. Improve your
model based on this feedback.
He talks also about how to keep open this Valuation Feedback loop open for a healthy assessment by
means of:
● Talk to a diverse audience
● Transparency over opacity
● Listen to those who disagree with you
● Be willing to change

Feedback received by Aswath Damodaran on his initial Zomato Valuation:


➢ Indian Food Delivery: He learned more about Indian Food Delivery and restaurants in India. He
learned that Zomato Pro was not caught on as quickly as the company thought it to be maybe
because the offers and discounts it gives are looking better on paper than in practice.
➢ Regional preference in India between Zomato and Swiggy.
➢ The tax rate in India: Current corporate tax rate in India is 25%
➢ Market Size: Feedback was given as to why did he not consider the global food delivery market
and only took the Indian market. Also, people asked him why did he not take grocery stores and
cloud kitchens and only took restaurants into consideration. They asked him about the possibility
of Zomato exploring other businesses with restaurants. Benefits that Zomato has with its
expansive networking channel. Aswath points out here that the revenue slice in the grocery
delivery market is much smaller than in the restaurants market.

In the last part of this video, Aswath explained a walk-through on his DIY Valuation on Zomato. The
motive of this was not to influence one’s decision and choices while valuating Zomato but to help in
making one’s own decisions in Valuation. Ge took factors and divided them into easy-to-understand
drivers of valuation. He segregated them into different scenarios under different influencing factors on
that particular determinant in the Valuation model used.

Determinants in DIY Zomato Valuation by Aswath Damodaran…


❖ Total Addressable Market (TAM): influenced by the assumption of the Indian Food delivery
market growth
❖ CAGR and its acceleration: Growth is front-loaded, back-loaded, or is equally distributed.
❖ Market share: In his initial base case valuation he took Zomato’s market share to be 40%. In
this review, he says that this can obviously change depending on the networking effects on it.
❖ Revenue slice: Zomato gets to keep only a portion of each gross value. About 21% revenue slice
for FY 2021. Damodaran used 22% in his valuation. He says that maybe this can rise to even
25% if the market turns into a duopoly. Or even another scenario can be taken if Amazon Foods
forces more competition to restrict Zomato to a 15% slice in all orders.
❖ Operating Margins: This determinant depends on the economies of scale, pricing power, scaling
benefits, and competition. He took 35% margins in his valuation. Undermining the pricing
power can lead to margins becoming higher.
❖ Pathway to Profitability: How quickly they will get to the target margin.
❖ Reinvestment: Growth requires you to reinvest money back into the business. For Zomato, that
reinvestment can be in the form of acquisitions, technological reinvestment, and in the platform.
He devised a useful metric for this as the Sales to Capital ratio. This ratio is basically $ of
revenue generated per $ of your investment. This Sales to Capital Ratio is directly proportional to
the Reinvestment rate.

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