Is it time to buy Zomato yet? Devang Mehta answers

“Will the fall in stocks like Zomato stop somewhere? The answer is yes. There has to be gravity somewhere but should one have the conviction to buy this type of business? The answer is a clear no at this point,” says Devang Mehta, Head-Equity Advisory, Centrum Wealth Management

Help me decode what Zomato is trying to do?
Out of syllabus question! But jokes apart, a lot of these companies are right now facing misery for listing on a wrong valuation. The times were so good and everyone was just making merry and all these companies sort of got listed at phenomenal valuations. People were just scrambling for getting allocations in this so-called new age businesses. Yes we all know but still we are not adept at the culture where one values a company on price to sales rather than price to profit. So we need to still digest that. But the other part is most of these companies don't know how to do business. They know how to burn cash and gather market share but are yet to learn how to manage relationships or get into investor relations and answer the investing community.

These companies are still not able to answer difficult questions. So my sense is right now the times are so tough that the great new age businesses are already trading 25-30% down. The IT businesses which commanded great valuations and even banks are available at two times price to book, 1.8-2.5 price to book. How can these new age companies, where NASDAQ companies are getting crashed, would command this sort of a valuation premium? So there are multiple answers. But all this is leading to extended fall in these companies. Will the fall stop somewhere? The answer is yes. There has to be gravity somewhere but should one have the conviction to buy this type of business? The answer is a clear no at this point.

Insurance is one sector where I am surprised that there is no strength. Do you agree with me?
You hit the nail on the head and in fact I was about to mention that we have started to like insurance as a sector a little more than we liked pre Covid. This has been one of our mainstays in our portfolio and no marks for guessing that it has underperformed the broader markets.

Yes, Covid was one of the biggest dampeners in terms of not only the sentiment but top lines of all of these companies – be it HDFC Life or SBI Life or ICICI Lombard or Star. Most of these companies' top lines have been growing, the bottom lines have not been shrinking but the companies are still profitable after responding to so many claims.

HDFC Life itself responded to around Rs 4,400 crore of claims. The sense one gets here is that all these companies are now slated for a supernormal type of profit. If we are calling this an endemic, let us hope and pray that we are probably past the worst of the pandemic. So, this is going to happen and the next three, four years will surely belong to this industry with all the price to embedded book values all probably collapsing in this sort of mayhem, my sense is these are now value bets in a way.

In the western world, a lot of the insurance companies of the same entity command more market cap than the banks. We are far away from that. Today HDFC Bank would be roughly Rs 7 lakh crore and HDFC Life would be around Rs 1.25 lakh crore. That gap has to narrow for sure. We are bullish on insurance – be it life insurance or even general insurance.

Everybody was bullish on LIC when it went public. I also thought that it is a cheap stock and I must admit that I never expected LIC to go below Rs 700. Three powerful foreign brokerages have got weight behind their word and have come up with a buy report on LIC and the stock has not moved by even 5%. Who is selling LIC?
I think that is the sentiment part of it. This is one company which was available at a valuation which was not only mouth watering but it was also a brand which India identifies with.

Secondly, insurance as an industry was going through a certain overhang which it has come out of.

Thirdly, the most important factor for LIC is that the retail community as well as the HNI community know that the government is not going to wait for a very long time and the overhang of divestment which happens with a lot of PSUs is still not passé as this was a very small dilution that the government did. But probably within 1-3 years, further dilution would also come into play which has always happened with ONGC and Coal India though I am not comparing the businesses.

Secondly, how LIC adapts itself in terms of disclosures with the private sector peers and when foreigners come to India, they generally want to buy the best private sector banks or the best private sector IT companies and the best private sector insurance companies. So how it falls in line with the foreign investor community is also one thing which probably needs to be monitored.

Of course, it is not at all bearish on LIC but yes, it needs to now compete with the private sector peers in a positive way. But yes, from a valuation perspective, it looks very cheap.