Zomato Media Pvt. Ltd has been valued at about $500 million by brokerage HSBC Securities and Capital Markets (India) Pvt. Ltd, about half the valuation at which the restaurant search firm raised its last round of funding in September.
HSBC has cited concerns surrounding Zomato’s advertisement-heavy business model, growing competition in the food ordering space and money-losing international operations for the lower valuation.
Zomato and its largest shareholder Info Edge (India) Ltd disagreed, saying the restaurant listings company will become profitable “very soon”.
“We respectfully disagree with several of the points raised by the HSBC report,” Sanjeev Bikhchandani, founder and executive vice-chairman of Info Edge said in a telephone interview.
Zomato’s “revenue has more than doubled in the last nine months and continues to head north at a good clip. Costs have been rationalized and burn is down by more than 70% from the peak. The company has plenty of cash and its unit economics are really good.”
HSBC’s estimate that Zomato is significantly overvalued comes amid increased scrutiny by investors of so-called unicorns, or private companies that are valued more than $1 billion. It also comes days after investors in Flipkart Ltd, India’s most valuable start-up, marked down the company’s valuation by 30-40%.
To be sure, putting a value on these companies is neither simple nor absolute.
HSBC, in its 19 April report, initiating coverage of Info Edge (India), said that except for its job website Naukri.com, other businesses in the portfolio do not look promising.
“We do a DCF (discounted cash flow) and value the (Zomato) business at about 50% lower to the $1 billion valuation,” HSBC analyst Rajiv Sharma said in the note to clients. “Zomato is present in 23 markets so early on and none is profitable, 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.”
A spokesperson for Zomato said HSBC has not contacted the company for its views and “doesn’t obviously understand” the business well.
“Our investors are as bullish about Zomato as they were before. We are growing fast and are on course to becoming profitable as a company very soon. Beyond this, we do not want to comment on valuation markdown speculations of third parties.”
“Our ad business in various countries has up to 93% gross margin… We are profitable in eight countries as of today,” the spokesperson added.
Zomato raised $60 million in fresh capital in September 2015, largely from Singapore’s Temasek Holdings Pte and existing investor Vy Capital, valuing the company at about a billion dollars. The company, in which Info Edge owns about 47%, has raised about $225 million since inception in 2008.
“We value our investments at cost and Info Edge has not marked down Zomato at all,”said Bikhchandani.
He also emphasized that the advertisement business is scalable with growth potentially coming from more restaurants moving from free to paid.
He, however, agreed that a very low percentage of restaurants currently pay. “Mobile has barely begun to be monetized and more than 50% of Zomato traffic is from the mobile. So in our opinion, the ad model of Zomato has a long way to go before it is saturated,” he added.
Restaurants on Zomato that pay for advertising account for a mere 6-8% of its total restaurant database and the nascent online food ordering business will take time to develop into a strong revenue stream, according to the HSBC report.
“In our view, for Zomato.com to emerge as a market leader in the restaurant search space, it needs to focus on online food ordering and build last-mile delivery capabilities,” according to the report.
In February, Zomato said that it reached operational profitability in six markets—India, the United Arab Emirates, Lebanon, Qatar, the Philippines and Indonesia.
However, the HSBC report says that Zomato’s recent cost focus may only help profitability in the near term and not the long term.
“If companies in the online food delivery business, in particular, gain market traction, Zomato.com’s advertising business model could lose business. As a result, we think the company needs to develop a profitable online delivery business itself (and not outsource) at least in its top markets to complement restaurant search. This implies that Zomato.com will have to keep raising funds and investing for some more time to come, which would dampen profitability for a couple of years,” the report added.
HSBC did not provide any further comment beyond the published report.
Food technology start-ups in the country have suffered due to a slowdown in funding, with some either closing down or getting acquired after failing to raise capital.
Dazo shut down in October and Spoonjoy, run by Emvito Technologies Pvt. Ltd, was acquired by hyperlocal delivery company Grofers (Locodel Solutions Pvt. Ltd) the same month.
Eatlo Tech Solutions Pvt. Ltd ended operations in December.
Another food ordering start-up TinyOwl has been struggling to raise money and scaling back operations.
In January, Zomato too shut operations in four cities—Lucknow, Kochi, Indore and Coimbatore.
However, the battle in the food ordering space is now limited to three players—Zomato, Rocket Internet backed Foodpanda.com and Bengaluru-based Swiggy (Bundl Technologies Pvt. Ltd), which has managed to raise close to Rs.340 crore since its launch in 2014.