After successive markdowns of highly priced tech startups by US mutual funds, it’s now HSBC’s brokerage arm which has slashed the paper valuation of restaurant-discovery platform Zomato, while taking stock of the startup’s publicly traded shareholder InfoEdge. This is possibly the first instance of such a markdown being done by an India-based equity research team for a privately held internet company.
A note circulated by the HSBC arm last month covering InfoEdge raised grave doubts around Zomato’s steep valuation, its international expansion and its overall business model. HSBC Securities and Capital Markets in a detailed report, titled ‘India Internet – Lot of Growth but Slim Pickings’, posited, “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-billion valuation.” InfoEdge holds nearly 50% in the Gurgaon-based Zomato and also runs sites like Naukri.com, 99acres and Jeevansathi, among others.
In an emailed response to TOI’s query, a Zomato spokesperson said, “We’ve not raised any financing round since the last one to have a valuation reset. Our investors are as bullish about Zomato as they were before. We are growing fast and are on course to become profitable as a company very soon. Beyond this, we do not want to comment on valuation markdown speculation of third parties.”
Zomato has had a tough last one year as it prunes its business, leading to hundreds of people getting laid off, closure of operations in a few cities, and a stream of top-level talent leaving the company. Having stayed away from the food ordering segment for a substantial period of time, Zomato entered the space in April 2015. Zomato Order has been fighting it out with the likes of Bangalore-based Swiggy to capture market share in a category which has very high user acquisition costs.
The note by analysts Rajiv Sharma and Darpan Thakkar deep-dives into why the brokerage firm has taken a negative view on Zomato and also on InfoEdge. “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,” the note explained. Restaurants that pay for advertising only account for around 6-8% of Zomato’s overall database, the analysts said. In the same report, HSBC lowered the valuation of another InfoEdge investee company, PolicyBazaar, by 10% from the current $200 million.
The Times Group, which publishes this paper, runs portals like Magicbricks, Timesjobs and competes with InfoEdge’s properties.
Zomato, which counts Sequoia Capital, Temasek and VyCapital, besides InfoEdge, as its investors, has in all scooped up $224 million in capital since its inception in 2008. When it raised its last round of funding in September last year led by Temasek, the company had said it will use the fresh capital in new businesses, such as online ordering, table reservations (Zomato Book), cashless payments, point-of-sale, and its white label platform. Some of these businesses have already been shuttered (like cashless payments due to lack of product-market fit), the company had said earlier. In February, Zomato said it has hit operational break-even of its businesses in India, the UAE, Lebanon, Qatar, the Philippines and Indonesia. But talks with prospective investors for infusion of capital have gotten scuppered because of a valuation mismatch.
Trouble Continues For Food-Delivery Startups
The so-called food tech category is one of the worst-hit in this funding cycle, which peaked last year, as ebullient investors poured a slug of money into consumer facing internet businesses. Casualties in the space include Mumbai-based TinyOwl, which is backed by marquee VCs Sequoia Capital, Matrix Partners and Nexus Venture Partners, and Foodpanda, a part of Rocket Internet’s portfolio, along with smaller players such as Dazo and Spoonjoy. Since the end of last year, mutual funds, which invest in public and privately held companies, have been reworking valuations of their investee companies, largely in the tech space.
Flipkart, India’s largest e-commerce player valued at $15 billion, has seen its value being cut by a group of existing investors. Though, in recent months, questions have been raised on the methodology being adopted by mutual funds while making these readjustments. The view so far has been that these funds, which have heavy exposure to the public markets, have followed the plummeting stock market which saw major corrections in tech stocks between August last year and January this year. Recently, though, Fidelity reversed many valuation markdowns in startups like Snapchat and cancer drug startup Stemcentrx, which was sold to drugmaker AbbVie for $5.8 billion just last week. Derrius Guice JerseyShare This