Here’s Why HSBC Has Valued Zomato At $3.6 Bn

As the number of food deliveries increase in the country with the largest players intensifying the foodtech war, a new report by HSBC Global Research has valued Zomato at $3.6 Bn.

The report comes as a part of taking stock of the startup’s largest shareholder Info Edge, which runs job portal Naukri.com, real estate site 99acres and Jeevansaathi.

Interestingly, last year in January, Morgan Stanley had  pegged Zomato’s valuation at $2.5 Bn as it expected Zomato to clock up to $1.3 Bn in revenue, including delivery fees, in FY2018. Furthermore, the report stated that the startup will register 27% EBITDA margins for 2018.

And for the most part, Zomato has achieved those targets. After crossing a $1 Bn GMV target in October, it also posted a 40% growth in its revenue for FY18 and targeted expansion to 100 cities across India. For the coming year, HSBC report said Zomato’s business has changed fundamentally, with food delivery now contributing about 70% of total revenue.

HSBC was the one who marked down Zomato’s valuation to $500 Mn in May 2016 due to concerns surrounding Zomato’s advertisement-heavy business model, growing competition in the food ordering space, and money-losing international operations.

However, HSBC has now said: “Given the scope of its recent expansion and the need for further funding, we value Zomato on a discounted cash flow basis, at $3.6 Bn (at a marginal 9% premium to its competitor Swiggy as of the latest round of funding) versus $0.9 Bn earlier due to the change in business focus.”

This projection will be tested when the company raises fresh capital.

The report said, “We expect employee costs and delivery fee costs per order to gradually decline with larger acceptance of these platforms and an increase in the number of orders per person. We estimate 300 Mn food-delivery orders a month by FY24, with Zomato enjoying 37%-40% market share.”

HSBC estimates that the Indian market will mimic its Chinese counterpart, with economies of scale kicking in, even as companies build out their infrastructure, along with rapidly evolving consumer behaviour. The comparison draws from the fact that China records 600 Mn food delivery orders a month.

Interestingly, this comes soon after Zomato offloading its UAE business to Delivery Hero, which also participated in the company’s latest funding round.

Zomato currently operates in 100 cities across the country, and has targeted entering 500 cities over the next 24-36 months. Deepinder Goyal, cofounder and CEO of Zomato, reportedly said, “We do not subscribe to the notion of our valuation defining success or failure for us — we are focused on execution, and we believe that in the long term, customer love is all that matters.”

The HSBC report also pointed out the downsides that could affect the valuation of the companies operating in the sector, such as employee unrest due to low salaries and lack of social benefits.

Zomato has been in a tough situation since its Bengaluru-based rival Swiggy raised $1 Bn in 2018, at the end of the year after joining the unicorn club earlier in the year. To challenge this, Zomato has also been in talks to raise a large funding round of $500 Mn-$1 Bn.

Also, recently reports surfaced that Swiggy is in talks with UberEats for a 10% stake in the company. It is also being speculated that UberEats India racked up a cash burn of around $25 Mn on an average 9 Mn orders a month, while Swiggy burns about $40 Mn – $45 Mn a month on its food business. A recent RedSeer FoodTech Leadership Index (FLI) ranked Swiggy at the top place with a total score of 96 in the fourth quarter of 2018 while Zomato came in second with a score of 82.

[The development was reported by ET.]

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