May is fast proving to be the month of markdowns for Indian startups. In less than a week after Fidelity Rutland Square Trust II and Valic Co. marked down their stake in Flipkart by 20%, it is now the turn of HSBC’s brokerage arm to slash down the paper valuation of restaurant-discovery platform Zomato by 50% to $500 Mn from the earlier valued $1 Bn. This is about half the valuation at which the restaurant search firm raised its last round of funding in September.
HSBC Securities and Capital Markets in a detailed report, titled ‘India Internet – Lot of Growth but Slim Pickings’ raised concerns surrounding Zomato’s advertisement-heavy business model, growing competition in the food ordering space, and money-losing international operations for the lower valuation. The report stated,
“Zomato is present in 23 markets so early on and none is profitable, which implies that to address both the investments in last-mile delivery and losses in international operations, fund-raising will be a continuous phenomenon, suggesting current valuations don’t make much sense. We do a discounted cash flow (DCF) analysis and value the business at 50% lower to the $1-Bn valuation.”
InfoEdge which holds nearly 50% in the Gurgaon-based Zomato and also runs sites like Naukri.com, 99acres and Jeevansathi among others, however disagrees with the markdown. In a statement to Mint, Sanjeev Bikhchandani, founder and executive vice-chairman of Info Edge, said, “We respectfully disagree with several of the points raised by the HSBC report. Zomato’s “revenue has more than doubled in the last nine months and continues to head north at a good clip. Costs have been rationalised and burn is down by more than 70% from the peak. The company has plenty of cash and its unit economics are really good.”
Interestingly, in the same report, HSBC has also lowered the valuation of another InfoEdge investee company PolicyBazaar by 10% from the current $200 Mn.
However, the note by analysts Rajiv Sharma and Darpan Thakkar have a negative view and explain in detail why the brokerage firm affected the markdown. The notes say, “Competition will always find it easy to take share via other routes, particularly online last-mile delivery model. We understand that last-mile delivery is not easy but unless Zomato leads in this space it will find it tough to retain market share. Particularly, we have Swiggy in India which is very active in the space and has been getting funding at regular intervals.” As per the analysts, restaurants that pay for advertising only account for around 6-8% of Zomato’s overall database and the nascent online food ordering business will take time to develop into a strong revenue stream.
Meanwhile Zomato also disagrees with the brokerage firm’s negative view. Founder Deepinder Goyal has come up with a detailed blog post titled Unicorn Or Not in which he spoke about Zomato’s GMV, ad sales profitability, and refuted arguments made by the report.