Despite shaky Q3 earnings, why Pankaj Murarka is gung-ho on Zomato, Paytm

Pankaj Murarka, CIO, Renaissance Investment, says Zomato is doing the right thing being as aggressive as some of the other competitors are and probably hold on to its pole position or a leadership position in Blinkit which is very critical from a longer-term profit pool perspective. It will hurt them in terms of bringing forward losses and probably they will end up burning much more money in that sense. But from a longer-term strategy point of view, it makes imminent sense.

Murarka further says, two to three years ago, Zomato was valued at Rs 50 and Paytm traded below Rs 400, attracting little interest from investors. Now, they have become popular choices in portfolios. This may be a good time for adjustments, but these companies will be among India's fastest-growing enterprises in the next decade.

I have to prompt everybody to smile in this market. I say that markets are down 30%, but they are still 60% up from where they were two years ago.
Pankaj Murarka: Absolutely and the bull market still holds. So, we are very much in a bull market. Maybe it is a slightly more mature bull market than what it was five years back. But having said that, we have to consider the fact that we have had one of the most ferocious bull markets that I have seen in my career after the technology bull market of 1999 and 2000, probably this has been the most ferocious one. So, the kind of gains that we have had in this bull market over the last five years have been pretty strong and very phenomenal.


Talk about something which you got absolutely right and everybody wants to know that where is that cluster headed, fintech and consumer tech. You bought into Paytm when everyone said no. You bought into Zomato when everyone says no. You bought PolicyBazaar when everyone said even a bigger no. Now that everybody has started saying yes to these stocks, earnings are a bit shaky from Zomato and Paytm.
Pankaj Murarka: Well, we look at numbers in the context of the expectation which the Street has set. Look at these businesses from the perspective that all of these companies are just about 10 years old. These are businesses which were set up 10 years ago. Ten years ago the food delivery industry did not exist. And today it is an industry which does over close to about $10 billion of gross order value.

Zomato is probably, in my reckoning, one of the fastest companies to get into an index – Sensex – within 10 years of their formation. No other company, if you look in Sensex, has been able to get into the top 30 or top 50 companies of India within the 10 years of their starting date or in the first 10 years of their life cycle. That shows the kind of exponential growth curve that these businesses have been in the first 10-12 years of their being around kind of a thing. So, while the numbers being somewhat under expectation, higher competitive intensity, few more players coming, and all of that, is more in the context of what markets or analysts expect from a quarterly perspective.

I still think on a longer-term basis these businesses still have a very long growth curve ahead of them. I still hold my view that some of the leading companies of India, probably 15 years out, will emerge from disruptive tech – be it consumer tech or fintech. One of the top five financial services companies will be a fintech company 10 years out because consumers like you and me are doing all our financial transactions now through help of technology rather than the old traditional way of visiting branches of banks or NBFCs.

I still think that given the fact that numbers are somewhat under expectations, valuations had run far ahead, probably the trade had become too crowded because stocks have done phenomenally well, and as you rightly said life has come full circle for some of these companies. Two or three years back, when Zomato was at Rs 50 or Paytm was under Rs 400, no one wanted to own them and today they have become some of the hot favourites and most of the portfolios and investors have these stocks in their portfolio.

So, it could be a time for some calibration, some consolidation, but for longer-term investors, I still think these companies will be some of the fastest growing companies of India over the next 10 years. I think that story or hypothesis still remains very much in place.

Let us talk about specifics here and then I will pick up Zomato just for discussion purposes. Long, short, we are not getting into recommendations. Is the quick commerce space getting competitive or what Zomato is doing in terms of investing upfront, is it the right strategy?
Pankaj Murarka: I think so. I will give you a context. When Zomato came into food delivery in 2013 or 2014, there were 15 players. Given the nature of technology oriented businesses, these businesses have access to a huge amount of capital and they are very aggressive in terms of execution. Today, 10 years out in food delivery, we just have two players and these two players Zomato and Swiggy control about 80% of the market.

The good thing about technology driven businesses is competition is very intense and probably very cutthroat. It is survival of the fittest, but you achieve industry consolidation at a very early stage in the life cycle of a business versus traditional businesses. Just to give you a parallel, let us say just think about cement as a business. The cement industry has been around for a hundred years and even today in India, you have 50 cement companies and the industry still remains fragmented after being around for 80 or a hundred years.

What happens in this technology driven businesses is that because the competitive intensity is so intense, cutthroat competition forces industry consolidation in an early stage which eventually leads to an oligopoly kind of situation. For example, the kind we have in food delivery and which effectively means the profit pool for the winner or the person who is able to survive, the company which is able to survive is pretty large and for a very long period of time. So, I think quick commerce is going through the same cycle which the food delivery business went through in the first five years of its evolution.

I think Zomato is doing exactly the right thing being as aggressive as some of the other competitors are and probably hold on to its whole position or a leadership position in Blinkit which is very critical from a longer-term profit pool perspective. It will hurt them in terms of bringing forward losses and probably they will end up burning much more money in that sense. But from a longer-term strategy point of view, it makes imminent sense.