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Food ordering and restaurant listing service Zomato has been valued at $500 million, a reduction of 50% from its current $1 billion valuation, by HSBC Securities and Capital Markets. In the research note, HSBC raised concerns about Zomato’s advertising-heavy business model, growing competition and businesses abroad. The report also added that Zomato should instead develop a sustainable delivery business.

In a blog post, Zomato co-founder Deepinder Goyal countered the report on several points.

Here’s a lowdown on what HSBC and Zomato said:

1. HSBC’s valuation method: HSBC’s note said that there was a consensus which valued Zomato at $1 billion but it disregarded them and added “we don’t think private valuations are a good benchmark“. Instead, it employed a methodology called Discounted Cash Flow (DCF) which uses future free cash flow projections and discounts them to arrive at a present value estimate. The DCF first determines a company’s trailing twelve month free cash flow (FCF). It would then compare previous years’ cash flows in order to estimate a rate of growth. Other things which determine values is sales and costs associated with it. More on that here.

Zomato’s response: Zomato says that the report acknowledges that HSBC differs from consensus, which ‘means that this report is an outlier, and there are enough analysts, VCs, and founders out there who have called us (Zomato) “the only defensible Indian unicorn”, and have said “there’s multiples more inherent value in Zomato” about us.’

Zomato’s numbers:

  • 2100 employees
  • Traffic up 8% in April 2016 over March 2016
  • 8.5 million monthly uniques in India
  • Present in 23 countries, market leaders in 18.
  • 33,000 online orders yesterday; claims to be the largest player by GMV, and profitable at unit economics level
  • Expecting 40,000 orders per day in 3-6 months
  • Melbourne and Sydney are already in the top 5 revenue generating cities
  • revenue has doubled over the past 9 months
  • More than 95% of the restaurants in our core markets have yet to be monetised
  • Mobile, which is over 50% of traffic
  • revenue in the Philippines is 1.5x of the total cost of the operation
  • aiming to hit overall profitability (without compromising on growth) at an overall company level in the next 6-12 months

As per HSBC:

  • 80,000 Indian restaurants are listed on Zomato.com
  • Paying restaurants account for 6% of the total database
  • Around 90% of the company’s costs relate to staff and real estate or rental expenses

2. HSBC says Zomato need to build last mile delivery capabilities for market leadership and profit:: The note said that Zomato needs to build a viable last mile delivery business soon. Food delivery and online ordering are ‘volume’ businesses that are unlikely to be viable unless either the market grows or any single company can command a 70-80% share. “As such, we believe that unless the company invests in last-mile delivery capabilities – and does so soon – it won’t be able to achieve sustainable market leadership and profitability.”

Zomato’s response: Zomato hit 33,000 orders and says that it is profitable at a unit economics level.  The overall online ordering business will hit profitability when they get to an average of 40,000 orders a day. They estimate they should get there in the next 3-6 months.

From the blog: “Also, there isn’t any food delivery company in the world which owns its last mile logistics fleet, operates at scale, and is profitable. These assumptions and statements in the HSBC report make it look like they’re coming from someone who doesn’t – and hasn’t bothered to – understand the space well.

Note, Zomato co-founder Pankaj Chaddah told MediaNama that the average order value in India is Rs 500. More on their unit economics here.

3. HSBC on ad sales profitability: Zomato  generates the majority of its revenue from advertising and the business commands a high gross margin of as much as 75%. However, as seen in the Chinese and US markets, the restaurant search space can quickly become crowded. In the US there are more than 25 companies competing in the restaurant search and delivery space, which makes a purely advertising based revenue model difficult to sustain.

Zomato’s response: Zomato does have significantly healthier margins in the ad sales business. More than 95% of the restaurants in core markets are yet to be monetised (or advertised). So that is significant opportunity to grow and won’t reach saturation. Mobile, which represents over 50% of traffic, is yet to be monetised seriously. Zomato will be bringing out a new product will be out before the end of the May which will bring mobile monetization opportunities.

InfoEdge’s response:

Sanjeev Bikhchandani, executive vice-chairman of InfoEdge, echoed Goyal’s statements regarding advertising.

“The advertisement business is very scalable according to us with growth potentially coming from more restaurants moving from free to paid (95% of the restaurants are yet to be monetized), increased focus on renewals, upgrades of paying restaurants and higher realisations from current paid customers.”

4. HSBC on US marketshare: The US is a crowded market. At present, the company is selectively entering the US in areas with low competition. Any attempt to scale up in the US will require significant investment, which will depend on its ability to raise funds.

Zomato’s response: 

HSBC, because it never spoke to us, doesn’t know that we didn’t acquire Urbanspoon for its US presence. We acquired it for Australia and Canada, and our traffic is kicking ass in these two markets. We are monetising the traffic in Australia already, and Melbourne and Sydney are already in the top 5 revenue generating cities for us across the world.”

5. HSBC on increasing sales teams in abroad: Zomato has established a presence in 23 markets and deployed a dedicated local team in a few already. They will need to do the same gradually in each of the other markets, which will raise costs. As a result, HSBC thinks sustained profitability will not be easy to achieve.

Zomato’s response: “All our countries already have large sales teams, which don’t need to grow any time over the next 12-14 months.”

6. HSBC: Competitive intensity to remain high in India: “We expect more companies to enter the space in the near to medium term, including firms involved in the last-mile delivery of groceries. Despite the venture capital and private equity funding slowdown, Swiggy still managed to raise $35m early this year, suggesting that the competitive intensity in India is likely to remain high for Zomato.com” 

Zomato’s response: Nothing