HSBC arm slashes Zomato valuation to $500 million

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In another setback to India’s fledgling startup industry, HSBC Securities and Capital Markets (India) has slashed the valuation of restaurant search service Zomato by 50 percent  to USD500 million.

The HSBC’s brokerage arm has raised grave concerns over Zomato’s steep valuation in a note titled ‘India Internet – Lot of Growth but Slim Pickings’. The report which covers Info Edge — that holds nearly 50% stake in Zomato — states: “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 USD1-billion valuation.”

The note cautions that unless Zomato steps up its last-mile delivery model, it will find it tough to retain market share. Its competitor Bangalore-based Swiggy has been receiving funds at regular interval, the note states. “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,”  say analysts Rajiv Sharma and Darpan Thakkar in the report.

Responding to the devaluation a Zomato said that it on the right track to become a profitable entity. “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,” a Zomato spokesperson to The Times of India.

Meanwhile, Info Edge founder and executive vice-chairman Sanjeev Bikhchandani told Mint, “We value our investments at cost and Info Edge has not marked down Zomato at all.” He, however,  agreed that only a few restaurants pay for advertising on the food services portal.  Only about 6-8 percent of restaurants pay Zomato for advertising on its portal,  according to the HSBC report.

The latest markdown comes on the heels of two mutual fund investors slashing the valuations of their investments in Flipkart. Fidelity Rutland Square Trust II has lowered the value of Flipkart shares it owns by almost 40 percent to USD82 apiece as of February 29, 2016, from USD135.8 in August 2015. Similarly, Valic marked down the value of its investment in Flipkart by 29 percent to USD98.19 a share from USD139 apiece.