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HSBC Says Zomato No More A Unicorn, Investors And Company Disagree

deepinder goyal / zomato
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In what has turned out to be a season of valuation mark downs for India’s biggest startups, Zomato is the latest Indian unicorn to go under investor scrutiny and has been valued at $500 million brokerage firm HSBC Securities and Capital Markets (India) Pvt. Ltd. The latest valuation almost halves the value of the startup from when it last raised funds in September.

HSBC analyst Rajiv Sharma said in his company’s note to its clients,

We do a DCF (discounted cash flow) and value the (Zomato) business at about 50% lower to the $1 billion valuation.

He cited reasons such as Zomato’s continued unprofitability in the 23 markets it had a presence in, along with increasing competition in the space as the main reason behind the undervaluation.

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.

However, HSBC’s report goes against Zomato’s internal assessments where the company has boasted of turning profitable in six markets. Speaking on the topic Deepinder Goyal, co-founder and chief executive of Zomato had almost three months ago said,

We have more than doubled our revenue year-on-year for the last few years, and we are going to post some great growth numbers this year as well. We are profitable in six of the 18 markets we are the market leaders in.

Zomato along with its largest shareholder Info Edge (India) Ltd, have disagreed with HSBC’s assesment. Sanjeev Bikhchandani, founder and executive vice-chairman of Info Edge told Livemint,

We respectfully disagree with several of the points raised by the HSBC report.

He also went on to say that Zomato’s revenue had more than doubled in the last nine months and that it had managed to bring down costs burn  by more than 70% from its peak as well.

Although, it should be added that HSBC doesn’t look upon Info Edge as too promising either. A report by the former on the latter’s portfolio had suggested that apart from its job website, none of businesses in the portfolio showed much potential.

Meanwhile, Zomato has responded by stating that HSBC obviously doesn’t understand the business very 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.

Well, that’s the marks the rare few times a firm specializing in analysis has been blamed of not understanding the business well. Meanwhile, HSBC has stuck to its analysis and said that Zomato’s strategies — which have included launching into new directions — will not have the kind of impact the company needs to turn profitable.

If companies in the online food delivery business, in particular, gain market traction,’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 will have to keep raising funds and investing for some more time to come, which would dampen profitability for a couple of years.

Well, it is hard to agree to one point of view or the other. While Zomato did shut down operations in four cities recentlyit did also launch a spate of new strategies and has at least continued to get the steady backing of its main investors. Meanwhile, it should be said that food startups in the country have been having a bad time all around — just look at Ola Cafe, Dazo, Spoonjoy, Eatlo Tech Solutions and even Grofers itself — and Zomato has at least been holding up pretty decently — so maybe, it actually does need some time and perhaps some more investments to flourish and make the transition to self-sustainability.

Meanwhile, Zomato should hope that the HSBC investment doesn’t have an adverse effect on its investors who have until now, continued to stick faithfully by the company and have poured in a total of $225 million since its inception in 2008. It raised $60 million in its last funding round in September 2015, mainly from Singapore’s Temasek Holdings Pte and Vy Capital, who valued it at $1 Billion.

Well, at least the company is not in Flipkart’s boat, which has been facing markdowns upon markdowns from its own investors.

A bibliophile and a business enthusiast.

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