Morgan Stanley Marks Up Valuation Of Foodtech Unicorn Zomato To $2.5 Bn

The research firm of Morgan Stanley has marked up the valuation of homegrown foodtech unicorn Zomato to $2.5 Bn. As per reports, the estimation of Zomato’s valuation was done by the global financial services firm while taking stock of the startup’s largest shareholder Info Edge, which runs job portal Naukri.com, real estate site 99acres and Jeevansaathi.

The development comes just four months after the Indian arm of Japan-based financial holding company Nomura valued the Gurugram-headquartered online restaurant discovery and food ordering startup at $1.4 Bn till March 2019.

In fact, over the last two years, Zomato has undergone two valuation changes. In September 2015, Zomato reportedly raised $60 Mn to 80 Mn funding at a valuation of $1 Bn.

By May 2016, however, its valuation dropped to $500 Mn, when HSBC Securities and Capital Markets slashed the company’s paper valuation due to concerns surrounding Zomato’s advertisement-heavy business model, growing competition in the food ordering space, and money-losing international operations.

According to the latest report by Morgan Stanley, Zomato is expected 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 this year.

“Zomato will emerge as one of the most exciting startups from India in the medium to long term – and in the process, create substantial value for Info Edge shareholders. We have lowered our consolidated earnings estimates for financial year 2019 and 2020 as we incorporate deeper losses in the near term – but believe Zomato could be a multi-billion-dollar opportunity,” said Morgan Stanley in the newly-released report.

As per the estimations of the global brokerage firm, Zomato’s valuation could reach $6.7 Bn in the next 10 years. In terms of the order volume, the online food delivery platform is poised to clock 34 Mn delivery orders in India this fiscal year. Compared to that, it reported around 11 Mn orders in FY17.

The report further estimated the share of deliveries done by Zomato’s own fleet to increase from 7% last year to around 20% by the end of FY18. Overall, the expected revenue from Zomato’s food delivery business will touch $25 Mn in the financial year 2018.

“Currently, in terms of volumes, approximately 50% of the online market is with the restaurants such as Domino’s, Pizza Hut, along with online kitchens such as FreshMenu. The remaining 50% is split between the aggregators. Swiggy is a leading player in order volume currently but we expect Zomato to close the gap soon, especially following its acquisition of Runnr, which provides full stack logistics capability to it,” the report stated.

The markup comes at a time when the foodtech unicorn is reportedly in talks to raise up to $200 Mn from Alibaba and its payments affiliate Ant Financial. If the investment goes through, the Chinese ecommerce giant is likely to pick up a stake in the company. At the time, it was reported that the funding round would value Zomato at about $1.1 Bn.

Foodtech Unicorn Zomato Going From Strength To Strength

Established by Deepinder Goyal and Pankaj Chaddah in 2008, Zomato has raised about $223 Mn funding and has made about 11 acquisitions till date. In 2015, amidst rising losses and competition, the foodtech unicorn made headlines for showing the door to 300 employees. The startup’s last funding was in September 2015, when it raised $60 Mn from Temasek and VY Capital.

Later in May 2016, Zomato rolled back operations from nine countries out of 23 international markets, in a bid to cut costs. It was around the same time that investor HSBC Securities and Capital Markets (India) marked down the company’s valuation by half to around $500 Mn.

By adopting a strategy focussed on diversification, and redesigning its ad serving product, the foodtech unicorn managed to cut losses by 34% in 2016-2017. In the annual report for FY17, Zomato reported an 80% surge in revenue to around $60 Mn. The restaurant discovery and food delivery platform witnessed an 81% drop in the annual operating burn for FY17 at $12 Mn compared to the $64 Mn in FY16.

The company’s food delivery service made headlines for raking in over 3 Mn monthly orders for the first time in July 2017. As per a recent blogpost by the company, Zomato’s food business has high customer retention. The company claims that about 65% of its newly signed up users for the food ordering business order again from Zomato in the next 12 months.

In August, the foodtech unicorn said that it on-boarded 21,500 subscribers for its paid Zomato Treats service. The company also claims that its cost of acquisition is negligible. The company claims to get over 120 Mn visitors a month across all platforms – consuming restaurant information, referencing content generated and shared by other users, placing orders for food delivery, or making reservations at restaurants.

A month later in September, it announced the acquisition of  B2B online service provider platform for hyperlocal logistics services, Runnr. The move was aimed at strengthening Zomato’s food delivery capacity. In the same month, Zomato reportedly invested in Hyderabad-based foodtech startup TinMen. Post this investment, Zomato and TinMen were said to be working together to expand its services, initially in Hyderabad, and then the rest of the country.

It was in September again that the company claimed to have hit profitability throughout the 24 countries where it operates, and across all its businesses. “Zomato is now a profitable company. Yes, throughout the 24 countries where we operate, and across all our businesses, we are starting to make money,” had said Deepinder Goyal in a blogpost.

Most recently, in November, Zomato announced the launch of its Zomato Gold, an exclusive dine out and social drinking membership programme, in India.

Battle In The Indian Food Delivery Space Getting Fiercer

As per the newly-released report by Morgan Stanley, India’s food delivery and takeaway market, including the unorganised segment, is currently worth over $19 Bn.

However, digital penetration in this space is only around 5%, compared to the markets in Spain, the US and the UK where online penetration is anywhere between 45%-50%. The report added that, in 10 years times, the Indian online food delivery market will rival that in the US and the UK.

A lot has been happening in the country’s online food delivery segment. On the one hand, Bengaluru-headquartered Swiggy has initiated discussions with Chinese investment conglomerate Tencent and existing investor Naspers for a potential $150 Mn-$200 Mn investment. According to sources, if the deal goes through, it would raise the online food delivery platform’s post-money valuation to $600 Mn-$650 Mn.

On the other, homegrown cab aggregator Ola acquired Foodpanda India from Germany-based Delivery Hero Group for $31.7 Mn (INR 202 Cr) last month. The move marked Ola’s return to the Indian online food delivery space after its first attempt Ola Cafe was shut down in March 2016.

The space has also witnessed the entry of new players like Google Aero and UberEATS in recent times. Earlier this month, it was reported that UK-based online food delivery giant Deliveroo was gearing up to set up operations in the Indian market. Valued at $2 Bn, the Fidelity and T. Rowe Price-backed startup is looking to hire a country head, who would be spearheading its India launch.

Whether the valuation markup by Nomura and the imminent $200 Mn funding from Alibaba will help Zomato push its growth further is something that will become apparent in the coming months.