Everything you must know about Zomato and HSBC’s valuation for Zomato

HSBC Securities & Capital Markets has slashed down Zomato's valuation by 50%, bowling it out from the Unicorn League! While Deepinder Goyal, CEO of Zomato, and his investors beg to differ.

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Everything you must know about Zomato HSBC valuation
Everything you must know about Zomato HSBC valuation

HSBC Securities & Capital Markets has slashed down Zomato’s valuation by 50%, bowling it out from the Unicorn League! While Deepinder Goyal, CEO of Zomato, and his investors beg to differ.

Yesterday I woke up to the Google alert stating that HSBC slashed down Zomato’s value by half. I sat down and recalled everything that has been happening with Zomato. Here is it (in brief):

Background

In February this year, Zomato was the first Indian Unicorn e-commerce to break even in several markets such as Philippines and India and it claimed to be on the road to profitability by mid-2016.

Zomato, started in 2008 as a restaurant search website and food delivery app. It grew slowly and steadily testing markets and expanded its reach to international borders of Australia, Canada, UAE & US.

The News

HSBC Securities & Capital Markets in its latest report says that Zomato needs to invest more in their last mile logistics to hit profitability. To which Deepinder countered in this email to 2,100 Zomato employee that the report has been written by someone who doesn’t understand their business model. Now, Zomato’s business model is based on advertisement. And delivery is a very small part of their business model.

Facts (as per Deepinder Goyal)

Big chunk of their ad revenue comes through the search and discovery (mostly from dining out and nightlife categories). And then, they are able to divert the traffic to ordering and table reservations without any additional cost for customer acquisition.

Talking of numbers, Deepinder claims to have achieved a lot:

Indian market: Traffic in India grew by 8% in April 2016 over previous month

Global market: Zomato has presence in 23 countries and is a market leader in 18 of them. It acquired Urbanspoon for Australia & Canada market. And they are already monetising from the traffic in Australia. Melbourne & Syndey are in top 5 revenue generating cities for Zomato.

Revenue and Profit: Zomato’s revenue has doubled over the last 9 months. Burn rate is down by 70% from the peak. Revenue from Philippines is 1.5x the total cost of  operation. the company is aiming for overall profitability, at company level, in the next 6-12 months.

Furthermore, Deepinder adds that the ones who understand their business, has not marked down their business valuation. In fact, their investors are still bullish about them and are ready to back them up, if needed.

The state of market seems to be fluctuating and have made investors wary of how much they bet their money on, and value the company they are investing in. The end of last year saw a lot of layoffs from the startups such as TinyOwl, FoodPanda, Pubmatic, etc. And e-commerce giant Flipkart was devalued by 11% by Morgan Stanley in March 2016.

Bubble burst on Twitter

One of the reason for this bubble burst of Indian startup is that the investors were promised specific growth rates and certain profitability estimation. But the companies were not able to meet the numbers as promised. Hence, investors are looking for re-evaluation and new estimation. Here is something that Mahesh Murthy shared about the story and Deepinder was quick to counter attack:

Mahesh shares his views on Zomato's re-evaluation by HSBC and Deepinder's reacts to it
Mahesh shares his views on Zomato’s re-evaluation by HSBC and Deepinder’s reacts to it

On the other hand Twitterati’s were supportive of Zomato and were ordering food through Zomato while media was discussing about HSBC’s claims:

Twitterati love for Zomato
Twitterati love for Zomato
Using it for the reason it was made
Using it for the reason it was made

Unicorn or Cockroach?

Zomato like a Cockroach has tested the market and has slowly (in the beginning, at least) and steadily expanded in the market. In January 2016, Zomato had to shut down online ordering system in 4 cities as the market size was too small in those cities. Did they try to give up their slow and steady Cockroach way to run the race of the Unicorn? Could the report be the aftermath of joining the race too fast too soon?

Whatever may be the case, I do feel Deepinder had handled everything really well. Right from assuring his employees that everything is under control and that they are in safe hands and should “get back to work”, instead of being affected by the news to handling the haters on social media. Kudos to him.

Now let me cruise for some nice dine out on my Zomato app. Bon Appetit!

Update: 30th May, 2016

Deepinder says his competitors have only 6-9 months left

Zomato’s CEO Deepinder Goyal in a conference call with its investor Info Edge said that in India, there are majorly three restaurant food delivery players, but he doesn’t think they have more than 6 to 9 months left. This was in response to the concern regarding the food delivery players that faced issue and had to shut down last year. Deepinder feels that the food delivery players that had shut down never really had a market share and the way others are working now they don’t have more than 6-9 months. Although its worth noting that Swiggy raised $35 million in January this year, and possibly another $7 million since then.

Explaining further, Deepinder highlights that issue with the food delivery is that it’s loss making to run a operation where the restaurant isn’t delivering. And making the last mile logistics work in the food space is very very hard.

With regards to their revenue, Zomato has recorded a loss of Rs. 492 crores of losses on the revenue of Rs. 185 crores for the fiscal year 2016.

Info Edge co-founder Sanjeev Bikhchandani is expecting Zomato to double their revenue this year. To which Deepinder assured that they have been doubling their revenues over the past six months while bringing the operation costs down by taking remote management approach in the countries: US, Canada, UK, Ireland, Sri Lanka, Chile and Brazil. By managing remotely they are seeking to cut down on high burn and high risk areas in terms of cash and management time. They learned this way of remote management through Urbanspoon’s not a feet on street model (which they had acquired in Jan 2015). Urbanspoon was able to capture Australia by a huge margin without ever setting foot there.

Zomato is looking to focus its in India and UAE where it has a strong presence.

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Avani Lalka is an experienced marketer, and a writer in the field of new-age marketing and career development. She writes from her heart to make a difference in the lives of the people that follow her. Currently she is heading Account Based Marketing (ABM) in a popular Pune-based startup. Feel free to connect her as she welcomes new ideas and opportunities. Email: lalka.avani7@gmail.com

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