JM Financial cuts Zomato's target price by 8% on ESOP costs
Zomato’s ESOP costs are no longer a one-off after the approval of the new policy, domestic brokerage firm JM Financial reduced the company's target price to Rs 230 from an earlier Rs 250.
The formulation of a new policy at Zomato suggests that ESOP costs should be treated as regular business expenses as they are likely to recur in the future. Hence, the domestic brokerage has adjusted its valuation methodology to capture the impact of ESOP costs better.
JM Financial stated that while Zomato had trimmed their reported earnings forecast to account for ESOP 2024 costs, they are yet to factor in the impact in their valuations, assuming these costs to be a one-off expense (ESOP 2021 was primarily a reward for senior management for successfully leading the company's public offering).
Zomato’s shareholders have approved the Employee Stock Option Plan 2024 (ESOP 2024), which allows for granting 18.3 crore stock options to its group employees. The dilution impact for existing shareholders on a fully diluted basis would be approximately 2%.
The ESOP 2024 policy states that options will be granted at face value, translating to an exercise price of Re 1 per equity share for employees. According to Indian Accounting Standard 102, the fair value at the time of issuance would be close to the market price at the time of the grant.
This leaves an impression that the new ESOP grant will be at a deeply discounted price, without any measurable performance-linked outcomes.
That runs the risk of the new ESOP policy being considered
