HSBC cuts Zomato’s valuation by half, and why the ‘growth’ argument is faltering

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After Flipkart, it is now Zomato.

In what is fast becoming a season of markdowns for tech startups around the world, HSBC’s brokerage arm cut Zomato’s valuation to US$500 million, which is about half of what it was valued at when the startup raised funding in September.

The brokerage was concerned about Zomato’s advertisement-heavy business model, growing competition in the food ordering space, and money-losing international operations, leading to the valuation cut, media reports said.

“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 percent lower to the $1-billion valuation,” the Times of India quoted the brokerage note as saying.

Zomato however, challenged the report, saying HSBC never spoke to Zomato, and “doesn’t obviously understand our business well. Beyond this, we do not want to comment on valuation markdown speculations of third parties.”

In an email to employees, founder and chief executive officer Deepinder Goyal said the company had the backing of its investors, had cut its burn rate down 70 percent from peak (he did not say what the rates were at), and that the company is aiming for overall profitability in the next 6-12 months “depending on how well we execute in the near future.”

In what reads like a dig at the HSBC analysts, he said “nobody who knows our business has marked down our valuations … But external perceptions of valuations are determined by the state of the market, and the availability of facts to the person who is analyzing these numbers.”

The company also claimed it was profitable in eight countries, but did not clarify which markets were profitable, and other details. Deepinder’s blogpost mentioned Philippines as an example, but did not have details on profits.

In January, Deepinder told Tech in Asia he was steering clear of promotions and wanted to be the first foodtech startup to break even in India.

The company at the time clocked an average of about 12,000 orders per day, with an average order value of INR 527 (US$7.8).

“We have not raised any round since the last round of funding 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,” a spokesperson said, but did not qualify what “very soon” could be.

See: Swiggy raises $35m funding, proves India’s food startups aren’t toxic

Fresh body blow