Did Zomato Overpay For Paytm Ticketing Business?
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00:00We are now going to take stock of a handful of companies out there which are buzzing in
00:15trade but before that we want to take a very quick look at how markets are faring. It's
00:19been a fairly quiet afternoon, not much to speak for in general and that's always good
00:25news considering the Nifty is trying to inch back towards the mark of 25,000 and a little
00:31over that is where it made its life high about a few weeks ago. But the other stock of course
00:38which is in focus today is Zomato. It has announced the acquisition of the entertainment
00:46ticketing business of PTM. It has not seen any reaction, in fact I'm looking at Zomato's
00:51volumes on an intraday basis and they are very, very ordinary. So it does seem like
00:56one, the indications that came through back in mid-June are coming to fruition. It does
01:05also seem like a lot of this has been relatively factored in and when it comes to the valuations
01:12at which the deal has been done, well it seems like at least investors are not too perturbed
01:19about that. But let's get in an expert opinion here. We have Karan Taurani, SVB at Elara
01:25Capital who is joining us on the show. Karan, good afternoon. Thank you so much for joining
01:29in. Firstly Karan, what are you making of this deal? At seven times, well some suggest
01:37that it's an expensive one, some suggest that just look at the run rate and going forward,
01:44what's your assessment? We have read your note, you are constructive on this particular
01:50deal but if you can elaborate a little bit more on this. Hi, good afternoon. So I think
01:56if you look at the deal in terms of valuations, it is not very cheap or attractive but I think
02:03the valuations are fair because the live events and the online ticketing business has the
02:10potential to grow at 15-20% on a steady state and we have just two last players here. One
02:16is BookMyShow which is the market leader and probably the second largest player is Paytm.
02:22So I think it makes strategic sense for Zomato to kind of scale up their going out business
02:27and Paytm is the best bet that they could have given BookMyShow as a market leader and
02:32they wouldn't want to sell out the state. Now what this does to the going out business
02:38of Zomato is that if you look at the top line, it's about 400 crores today, the going
02:43out business of Zomato which potentially moves up to 700 crores. This is the consolidation
02:48of this Paytm business which is there. Now this potentially can grow at about 15-20%
02:54on a CAGR basis which means that over the next few years, you can see these numbers
02:58kind of doubling up. So it's a must needed fillip or a boost for the Zomato going out
03:03business. It provides them that kind of scale. And of course, with scale comes economies
03:09of scale wherein you can have some kind of bargaining power in terms of permanency percentages.
03:13You can have bargaining power in terms of the various artists that are on the live event
03:17side. So too much to play over here and execution is key in terms of how they look at the margin
03:23improvement from here on because Zomato from a tech record perspective, they've been very
03:28compelling both on the food and the quick commerce business despite being a late entrant.
03:33They were the second or third entrant in both these businesses respectively. So I
03:37think if they're able to turn around to this business segment and if they're able to kind
03:41of match up to book my show scale over a period of time, I think that is the key multiple
03:46and second, of course, would be the margins, right? So I think they've guided for a very
03:50aggressive EBITDA margin of more than 20-25%. If they were to achieve even 20% EBITDA margin
03:55in this kind of a business, which is highly fragmented, highly competitive, I think it
03:59augurs well for the overall valuation of this business.
04:03Okay. Karan, I want to understand that Antfin's exit two days prior to this announcement,
04:12does this coincide with the announcement or what are your views on that?
04:17Yeah, so I think that exit has nothing to do with this deal. I think both are very separate
04:22things. In fact, if you look at the valuations perspective, our target price of 320 or rather
04:30EV that we were building in terms of potential target price, only 1% of that from a valuation
04:36standpoint was coming out from the going out business. And with this acquisition providing
04:40the must-hit boost and flip to the overall top line, we believe that maybe on a forward
04:45basis, 2% of your Zomato's console valuation will come from going out. So I think there
04:50is no potential impact or rather very big change in terms of Zomato's valuation or target price
04:57because of this deal. I think this deal is purely to leverage upon the young customer
05:02base that Zomato has got both on the quick commerce side and on the food side. They can
05:07use this opportunity to make this the third largest B2C business that they are going to
05:11offer. They can probably monetize this app via ad revenue. They can cross sell up, sell
05:17the customers through the online ticketing to food, to quick commerce, everything put
05:21together. So I think too much to play at here in terms of synergies and in terms of potential
05:26advantages for Zomato. But yes, the impact in terms of broader valuations is very, very
05:32miniscule because Blinkit and the food business contribute more than 85-90% of the valuation
05:38for Zomato. Karan, I just wanted to understand what is the current annual cash flow that
05:44Zomato generates? That's one part of the question. The second part of the question is that, is
05:48that enough to cover this particular acquisition? We already know that it's sitting on a cash
05:54worth about 12,000-12,500 crores. And please correct me if I'm wrong here. My question
06:00is, and perhaps some people in the markets are suggesting that even if this acquisition
06:06wouldn't turn out the way they are planning to, well, the cost of acquisition in the long
06:12run may not be considerable because of the fact that they generate so much cash. What
06:17is your assessment on this specific factor here? Yeah, so I think in terms of cash, it's
06:23very clear that it's a very strong business. They make more than 20% of EBITDA in the food
06:30business if you look at the adjusted EBITDA. And it is only growing from here on. I think
06:34there's going to be more expansion as we go ahead, more levers to play around ad revenue,
06:40around convenience, around your platform fee, around restaurant commissions put together.
06:45So I think there's a clear winner here as far as the investments are concerned. And in terms
06:51of free cash flow, the free cash flow will see a significant rise. They would be generating
06:55a free cash flow of about 500-600 crores today in terms of annual free cash flow. But the more
07:01and more we see in terms of traction within quick commerce, the bigger improvement that we see in
07:05terms of the food business margin improving, or in terms of the quick commerce turning profitable,
07:11the free cash flow numbers can even move up to 3x to 4x over the medium term. So I think
07:16potentially, they can generate even 2,000-3,000 crores of free cash flow every year. And even if
07:21they were to invest a few hundred crores of money into these businesses or going out in the form of
07:28discounts or promotions or any kind of investments for customer acquisition, I don't think it's going
07:33to matter much in terms of overall financials. So right from valuations, right from revenue,
07:39right from EBITDA number, absolute number basis, right from cash flow, I don't think there's any
07:44kind of a big impact that one can have either ways on negative or positive side.
07:49Okay. And Karan, in terms of competition, BookMyShow has been in this business for the
07:54longest time, and they've not been able to scale up the business as much as it was required.
08:01Yeah.
08:01There was a voice, I think.
08:04Sure. I'll repeat the question for you. So, Karan, I'm asking that...
08:06Somebody's talking. I think there's a technical glitch.
08:09Okay. Can you hear me properly now?
08:11Yeah. Somebody was talking in the background.
08:13Sure. No problem.
08:14Yeah. So my question to you is that, you know, BookMyShow has been in this business for the
08:19longest time now, and they've not been able to scale the business as much as they could have,
08:24right? So I want to understand that Zomato entering in this ticketing business. Do you
08:29think that they'll be able to cater to audience that BookMyShow has not been able to so far?
08:34And how much of a dent can they make in terms of BookMyShow's business?
08:39So, you know, BookMyShow has been a leader in this business. They have a very strong
08:43first-move advantage. And with the pandemic, you know, the trends towards digital got accelerated,
08:48wherein we saw that, you know, more ticket bookings for cinemas were done via online,
08:52live events, you know, more bookings were done via online. We saw sports, you know,
08:56coming up as a very big proposition. So I think that cloud of BookMyShow will remain here.
09:02In fact, BookMyShow also has got exclusive rights to some of the large sporting properties.
09:07We saw that during the World Cup as well. So I think that cloud will remain with BookMyShow.
09:11It's not very, you know, easy to break into that. But definitely, you know, once they reach a
09:17respectable scale, even, you know, something like Zomato Live or Trishtik, the new app is
09:22about to launch, even they would have some kind of bargaining power here, you know, with the
09:27content creators. So it all depends in terms of, you know, how they approach the sporting
09:32propositions, the IPL franchise, cinema, obviously, is there on both BookMyShow and on
09:38Paytm. So that is, there's not much of a change over there. And how they build their own IP,
09:43because you know, what is happening right now is that for a market like India, the events business
09:48is seeing massive demand. And this is specifically from a wide nature of events. We've seen a lot of
09:54international based events, we've seen other sporting events, like, you know, pro kabaddi
09:59Indian Soccer League, we've seen other kinds of events, you know, like, for example, there could
10:04be some music events, which are very special. So I think, you know, these kinds of things are only
10:08going to drive the demand further. And there is opportunity for them to break into this through
10:12the niche approach that they have in the events business. Right, right, right, right. Fair enough.
10:17Point taken, Karan. Well, thanking you, Karan, for joining us and giving us your perspective
10:22on Zomato and its latest acquisition.