HSBC’s $3.6-b valuation puts Zomato ahead of Swiggy
HSBC Research on parent InfoEdge says Zomato’s business has changed fundamentally, with food delivery now contributing about 70% of revenue
The jump in valuation also pushes Zomato ahead of its fierce rival Swiggy that was valued at $3.3 billion post a $1 billion funding it announced in December. The brokerage arm of diversified financial services firm HSBC has upped Zomato’s valuation while taking stock of its publicly traded shareholder InfoEdge, which holds 26% in the Gurgaon-headquartered Zomato.
In a detailed report on InfoEdge, HSBC said Zomato’s business has changed fundamentally, with food delivery now contributing about 70% of total revenue.
“Given the scope of its recent expansion and the need for further funding, we value Zomato on a discounted cash flow basis, at $3.6 billion (at a marginal 9% premium to its competitor Swiggy as of the latest round of funding) versus $0.9 billion earlier due to the change in business focus,” the HSBC report said.
The brokerage firm’s valuation projection for Zomato will be tested when the Ant Financial-backed company raises fresh capital.
Apart from food delivery, Zomato has also been doubling down on its membership product Zomato Gold. It expects the subscription-based programme to bring in $20-25 million in revenue by the end of 2019, highlighting the growing importance of the premium product to its topline.
India’s food-delivery segment, dominated by Zomato and Swiggy, is nascent compared to China, which sees an estimated 600 million monthly orders.
According to Zomato founder Deepinder Goyal, the company currently loses about Rs24 per order, compared to Rs45 per order six months ago.
However, HSBC estimates that the Indian market will mimic its Chinese counterpart, with economies of scale kicking in, even as companies build out their infrastructure, along with rapidly evolving consumer behaviour.
“We expect employee costs and delivery fee costs per order to gradually decline with larger acceptance of these platforms and an increase in the number of orders per person,” the HSBC report said. “We estimate 300 million food-delivery orders a month by FY24e, with Zomato enjoying 37%-40% market share.”
Zomato currently operates in 100 cities across the country, and has targeted entering 500 cities over the next 24-36 months.
The HSBC report also pointed out downsides that could affect the valuation of the companies operating in the sector, such as employee unrest due to low salaries and lack of social benefits.
Incidentally, in 2016, the brokerage had almost halved Zomato’s $1 billion paper valuation to $550 million, raising concerns, at the time, over its business model and its strategy to expand globally.
The valuation uptick projected by HSBC comes at a time when Zomato has sold its UAE business to German firm Delivery Hero for $172 million, or about Rs1,220 crore.
Goyal, who is also the CEO at Zomato, in an email response told ET: “We do not subscribe to the notion of our valuation defining success or failure for us — we are focused on execution, and we believe that in the long term, customer love is all that matters.”
The company, which is fighting a bruising battle with cash-rich rival Swiggy, recently raised $105 million in its latest funding tranche, with Naspers-backed Delivery Hero parking $50 million in the overall $315-million financing round.
Delivery Hero investment is seen as a relief as it has not been easy for Zomato to raise funds from a new investor in the past year.
The sale to the German firm was also aimed to keep Chinese ecommerce major Alibaba’s payment affiliate Ant Financial from becoming the dominant investor in the company, people familiar with the matter said. Ant Financial’s holding in Zomato is estimated at 28%.
What may further complicate fundraising efforts would be the consolidation that may come about with Swiggy and UberEats coming together as ET reported in its February 22 edition The HSBC report expects the overall food-delivery market to expand. “We estimate 70-75 million orders per month, 75-80% through Zomato and Swiggy. In China, by comparison, there are 600 million monthly orders,” it said. Currently, Swiggy and Zomato claim to be clocking 30-35 million orders monthly, but the firms do not give out these numbers officially.