Sunday, 16 August 2015

Info Edge India ltd and Network 18 media & Investments Ltd: Valuation of E-commerce Ventures-Zomato-Part 2nd

For earlier post on this topic, Click Here

Our company BHEL is building a 500 MW power plant in MP. It is a small town of MP. Once our entire team was having a party when one of our Engineer remarked, "we are doing a Great work by building this power plant”. Although his intention was of common welfare but I just shared with them my view. I just asked what great “value” this power plant would bring in the life of the people. What they will do with this power? What Great? They will use fans, lights, AC’s, watch TV, movies, Laptops, Phones. Are these great? Whether these are “Valuable”?

I told him that he was living a life more lavish than Lord Krishna but “this lavish Life” is not valuable to the Lord. Bring a sword to the neck of a Managing Director or CMD, most will tremble with fear and fall on feet. But the Lord is the one who will smile at the face of the Death. Whether we assign any value to the fearlessness and bravery?  What PE ratio we will give to a company which is making people brave? So we realize that value is Subjective. Lord will assign great value to bravery and we are happy watching Lord in a TV Serial. But objective consideration is that a business should provide value to the society at large to attract decent Valuations.

So the game of valuations is just a play of getting the value added by a business. And we are on our quest to understand the value added by most of our e commerce startups and whether that value will sustain.
As we know that E-commerce ventures are valued in a different way like on the basis of numbers of users of the product/service or reviews generated if portal is a discovery platform. Although these valuation metrics look very unconvincing to a common man having firsthand knowledge of the investing world. But these are not out of the context. I have given a brief example of newspaper vendor of a small town in part-1 of this post. Let us delve further.

Dynamics of Normal Business

Take a normal car selling company which has sold 1000 cars. Now one new customer buys a car. Will it change anything for old customers? Will it bring future or more business for the company? NO. Same is the case for a Steel company. The components of these types of businesses are not linked with each other. Person A buying a new car means nothing to B already having the same car. C will not give any value to the fact that he should BUY X car as A and B are having the same. He may choose the X after his analysis but nothing is contributed by the fact that A and B are using the same.

Dynamics of E-commerce Ventures

Now watch a telephonic company (assume a single one in a city) having 10000 customers, if one new person subscribed to its services, it will change the equation for everyone. Old user may get benefited to increased network and Telephone Company’s business will become more valuable as new person and so many others now communicate with each other, resulting in much more incremental revenue for the company.

E-bay gets more sellers of products because it is having biggest numbers of buyers. Every new seller will make things better for existing buyers and new buyers will make things better for existing sellers. Although new buyers are not beneficial for existing buyers but for existing sellers, so value addition here is diagonal.
Now move to Microsoft windows, new users make it more valuable because application developers will make new applications based on windows platform since more users are having it on their PC's/Laptops. So Application developers have more chances of making money if they make their application softwares based on Windows. works in the same way. More job seekers come to it as it is having one of the largest recruiters registered. More recruiters will join it as it is having biggest numbers of job seekers, so as advertisers. is in unique position as it is having three components of business process, Job seekers, Recruiters and Advertisers. It can monetize all of three although it is subsidizing Job seekers so as to get more from other Two.

                                                 Network Effect
So these businesses have one unique trait associated with them-Network Effect. They can benefit from network effect. Network effect emerges where one new user makes the business more valuable to existing users (either horizontal or vertical). Network effects are more profound and visible in E-commerce ventures although they were present earlier also. Like in Video Games, Video game developers will create games only for platforms that have a critical mass of players; because developers need a large enough customer base to recover their upfront programming costs. In turn, players favor platforms with a greater variety of games. 

Wikipedia is another example of Network effects where more entries are made in it as it is having more users and more users use it because it is having one of the largest entries.

Facebook derives the benefits of Network effects. Now suppose there are thousands of social network platforms available and people are using them equally. So no platform will be valuable…it will not get any investment and business as it is lacking the scale and it will not grow at all. But it never happens in real life, people shift their platform to the one which is having largest users as through it they can connect with more of their friends and make new friends. Network effect comes into existence on its own. So in E-commerce ventures you will always see one or two players having the entire share divided between them. Although existing players cannot relax on Network effect as there are forces which can disrupt an existing network…more on these later.

So no doubt, E-commerce ventures are valued on the basis of number of users as these can bring into play the Network effects which can multiply the revenue in the future when they are done away with their user acquisition phase. E-commerce ventures will spend handfuls on user acquisition initially and when they have critical mass then they start monetizing the entire network. And it can really become very big.

Zomato is just trying to be in a place to harvest the benefits of Network effects. So it is growing at breathtaking speed. It has acquired companies all over the world from Italy, UK, Australia to USA. Latest one was Urbanspoon from USA. Although USA was not the reason for acquisition as Urbanspoon was not the biggest in USA but it was in Australia and Canada. Yelp is the biggest in USA and Zomato has to make itself more useful and relevant if it wants to compete with Yelp.

Yelp is valued around $ 2 billion (around 13000 cr) down from $ 4 billion a year ago, after the news of its sale by promoters spread out. It is having around 150 million users every month. However unlike Zomato whose content is self generated, content of Yelp is generated by users and it is not restricted to food alone. Its turnover is around 2500 crores with NP around 250 cr in 2014. So Zomato with its superior content has all the might to compete with Yelp.

Zomato is present in 22 countries now, 43 offices worldwide, with around 1100 staffers from 65 nationalities. So it should focus on growing its existing business and monetizing the content. After it has gained some muscle mass, it should think of competing with Yelp which would require huge resources.

Its promoter Deepinder Goyal is a proud Punjabi, belongs to Mukatsar about 50 Km away from my hometown Bathinda. Punjabis are fighters and aggressive by nature. And so one thing that makes Zomato a class apart from other Indian companies is its aggressive tone. I have never seen any Indian company which is so aggressive. It is shaping its global dreams with killing instincts. In 2014, Zomato spent between $1 and 3 million for acquisitions in the Czech Republic, Slovakia, Poland, Italy and Turkey, but the biggest catch was Urban Spoon, with operations in the US, Canada and Australia for $ 55 million. Zomato is clearly going for the kill to reap the benefits of network effects.
Zomato has everything which can make it relish the network effects. First is its unique set of high quality content which is very difficult for any rival to replicate in short time and this is also working as a huge entry barrier apart from network effects.

Zomat’s most critical content is not user generated but it is aggregated firsthand. While starting afresh in the new city, one person is assigned in each city to collect data about the restaurants and clubs around the city. So they meet the owners, take the pictures of menus, Location, Food and other relevant data which is feed into a questionnaire having around 50-60 variables.  There is a centralized team which processes and cross-checks the data to confirm the validity. The data is then processed to be put up on the website. There is a separate team for advertising, which sells the website to the restaurant owners and attracts them to advertise with Zomato. 95% of the revenues are earned from advertisements from the local restaurants, while the rest can be attributed to event ticketing and restaurant booking.

Users can post reviews after visiting a restaurants, but only after passing some strict criteria. Zomato has algorithm and other technical expertise in hand to filter out the fake reviews which further improve the credibility of reviews. Restaurants can place their ads on the page; ads are appeared relevant to the search made by a user on the basis of locality and choice of foods. Restaurant owners are given a Dashboard page to see the traffic coming to them from Zomato and revenue getting generated. They can track the number of calls being made through Zomato, they can check the number of map views they got, the number of menu views they got. They can actually take a lot of metrics.

Restaurants placing their ads on Zomato are a perfect example of Targeted advertising which is a dream for any marketer. It is something I feel will change the dynamics of advertising industry where only 5% of the ads reach to the targeted audience which is highly expensive.

After the acquisition of Urbanspoon, its restaurant coverage has increased from about 300000 restaurants to more than 1 million restaurants across the globe and traffic is around 80 million per month. 

It is covering around 500 cities across the globe. This number is going to rise at an astounding rate in the future and these are not small numbers either. 

So now Zomato can afford to monetize its content. Apart from advertising, Zomato is focusing big on Order booking , table reservation, Payments all from Zomato platform. It wants to be relevant from Place discovery to final payment to a user. It has even tied up with Uber in india where a user can book a taxi from Zomato platform to the restaurant. 

Zomato has already acquired NexTable a US based restaurant reservations and table management Platform which competes against the Priceline's Opentable and SeatMe from Yelp.

Consumers will be able to search for a place to eat, check out recommendations and reviews from others, and then book a table there. Zomato can make revenues both on advertising on the search platform, as well as by taking a cut on reservations that it successfully makes for those establishments.

With this, Zomato is becoming more like with multiple revenue generating model. NexTable has developed a technology that lets restaurants update their data on the platform from smartphones and tablets, which makes a lot of sense considering the mobile nature of many of these businesses.

Acquisition of MaplePOS-a Potential Game changer for Zomato In Food ordering Business
In apr-15, Zomato acquired MaplePOS. It is developed by Delhi based MapleGraph, MaplePos offers restaurants features such as menu and inventory management, and has a built-in payment solution to accept debit and credit card payments. It is the first product based acquisition by Zomato. Food ordering is a big business, of 100000 crores in india and 30 lac crore globally. So Zomato can integrate this with its Data set and can offer more B2B solutions to restaurants and this can provide a recurring source of revenue for transactions on the cloud based platform.

Zomato is offering this with new name Zomato Base with features like modules for menu, inventory, recipe and customer relationship management, data analytics, electronic receipts, offline transaction support, payment gateway integration and a stealth feature which Zomato claims will change the way restaurants go about their business. As it is moving into food ordering and reservation services so technology is a must for smooth handling of the transactions and high end user experience. MaplePOS provides just that.

Zomato is going to launch this POS service globally within few months, so it will be a big game changer for it. Imagine a waiter tapping a menu card on a tablet that beeps an order into the front office machine that processes the order, deducts a payment against a credit card or prints out a bill.
The machine would be designed by Indian engineers but made in China. The plan is to help eateries run everything from customer intelligence to inventory management from an Android app and a matching machine.
I am yet to study the more updates and details regarding this, but will update as and whenever I get these.

It has already launched its food ordering application Zomato Order, which is a different application from Zomato restaurant discovery. It has kept it separate probably to unclutter the application and lightweight apps; although both are inter linked.

Online food ordering is going to be a bigger market, already Foodpanda and Tinyowl are expanding big. Dominos Pizza gets around 40% of its business through online ordering. Although Zomato is late in entering, but it is already having huge data base of restaurants and unmatchable sales force which go to every listed restaurant quarterly to take note of product updates. Integrating these restaurants into other schemas like food ordering and reservations are very easy and can be ramped up quickly.

So all in all, I feel it has passed the first phase of foundation and now ready to go ahead with monetization. How much it will generate is just a matter of time; nothing more.

Keeping alive the Network Effect-Being Relevant
Now we are at the most critical part. Survival. There is a belief in the investment circles that network effect is almost impossible to break. But there are some things which are relevant only in theory. Although they are still used in practical world by majority and most of the times this following by majority transforms something mediocre into outstanding…another case of network effect. Like valuation of companies and businesses by 10 year Discounted Cash Flow model. I always find it irrelevant. In today’s fast pace world, which is changing too fast; Relevancy whether technological or commercial is becoming more important than everything. Who can assess the cash flows of a business for 10 years with even 50% of certainty!!

These are just textbook models relevant mainly for theoretical and conceptual framework.
So network effects are somewhat overhyped in touting as a sole killing force in creating a giant E-commerce business. But that is not the case always. Burrp was the leader when Zomato was just a baby, today Burrp is nowhere. It vanished as it stopped being Relevant to the needs of users and competition.

Same thing happened with Orkut when Facebook untangled its huge web and emerged as the new standard in social networking. So then Facebook started to enjoy the Network Effects. And today in the wake of Twitter, Instagram and Linkedin, Facebook is trying hard to be Relevant to its users. Although Twitter and Instagram borrowed their concept from Facebook. Twitter “instant status” and Instagram “Photo Sharing”.

But there is more to the story of Orkut than Irrelevancy. In my view, Google underestimated the power of social networking and so it did not paid much attention to transform Orkut into something superior. Had orkut been the brainchild of someone like Mark Zuckerberg, it would have been alive. Then Orkut might have gone for IPO and would have raised funds for growth like Facebook Did.

According to the textbooks, eBay should own the Chinese market. In 2004 it acquired the largest local online-trading company, EachNet, which enjoyed an 85% market share at the time. EBay’s CEO, Meg Whitman, had witnessed the power of network effects in the company’s U.S. business and was confident to own the Chinese market too.

Things turned out rather differently. Taobao, a Chinese upstart owned by the Alibaba Group, completely displaced eBay within a few years.

When eBay first entered the Chinese market, e-commerce was in its infancy. At the time, technical equipment such as motherboards made up the bulk of online auction purchases, and EachNet, the company that eBay acquired, appealed mostly to technically sophisticated customers. Thanks to strong network effects, eBay’s platform became an increasingly attractive place to buy tech products.
Taobao’s Chinese executives recognized that the company couldn’t compete head-on with eBay in the existing market. So instead they focused on an emerging segment of online auction customers—people on the hunt for clothing and consumer products. Although eBay had a leading position in terms of overall market share, its share of the new segment—which would come to dominate e-commerce in China—was far less imposing. What’s more, eBay’s strong position with techies was no help at all in attracting fashion-focused customers, who were more interested in whether other fashionistas used the site.

Mistakenly assuming that the company had purchased its way to market leadership, eBay’s executives committed a series of strategic errors, ones they might have avoided if they had realized the threat Taobao actually presented. For example, eBay was slow to offer an integrated payment solution, and it insisted on charging customers significant transaction fees. Had its network advantage been real, the model would have made sense—the company with the strongest network effects can typically get away with higher charges (or lower quality). But eBay was not dominant in the emerging consumer market—the mutual attraction between fashionistas and techies was weak—and so its model didn’t fly. In 2006 eBay shut down its business in China. (HBR, Case Study-Apr-2014 Issue)

So network Effects alone cannot sustain the success, but there is no denying that if network effects are properly backed by Relevancy efforts than it becomes a potent force. Amazon is a testimony to this.
It is really getting lengthy here. I want to write more on the Disrupting potential of competition in network effect….but some other times.
I feel Zomato has its eyes wide open and is not sleeping on the cushion of Network Effect. In fact it is focusing big on its relevancy efforts.

So Info Edge should not be valued at present on the basis of valuation given to Zomato in the last funding round which valued it around 5000 cr. Zomato has just completed the investment phase so it is better to wait to realize its earning potential. If Zomato can reap what it has sown till date, it will be an Indian Giant in the making.

So now we have the conceptual framework of valuing E-commerce ventures. I wanted to cover and assess the strength of ventures like BookMyShow, Moneycontrol and Firstpost etc. These are all part of Network 18 media and investments which is now owned by Reliance Industries ltd. I never have the faith in any of the reliance group stocks whether it is belonging to Mukesh or Anil Ambani. I don't think that they can ever place shareholders ahead of their personal gains. So Reliance is the major negative for Network 18...that's why i am giving it a miss here and may be forever.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)


  1. Great work...the way you analyse businesses , market segments and companies is awesome....

  2. Impressive write up. Good coverage on the eCommerce business model and dynamics. Happy to see a home grown eCommerce venture moving aggressively not just in India, but also world wide. May be Zomato will be the fastest company to reach $1B valuation ? MaplePOS is just a midas touch. What a complementary solution. I believe they have asset light model. Compared to Ola, Meru and other scalable businesses, I like Zomato more as it has different streams of revenue channels. But, if we go by history, not all companies that have scaled fast across the globe have been successful. Do you think Zomato can overcome and be very successful ?

  3. Hi Manoj, Yes this multi channel revenue stream is something which puts Zomato at very different footing. It can monetize all these streams from one set of data, so no incremental costs.
    Yes, you are right. very few will remain in this killing game in the end. But one thing i am very much sure is that Zomato will not die. Urbanspoon did not die, it was killed by Zomato at hefty price of around 400 cr. As you may have noticed E-commerce ventures like Flipkart are acquiring the rivals fast. So in worst case scenario, Zomato can be bought by some rival.

    But with their very unique and difficult set of data, chances of failure are very less.They have become a generic name in restaurant discovery in india and i am sure they will bring more vital information in their data like Health Index ;) :) :)

    But this war is going to keep us on the edge of our seats.

  4. Sir,If you track microsec financials which has ventured into e commerce via sastasunder and foresee game, and deliberately surrendered application for nbfc .

    1. No Dear, never Studied it. But it has taken a good step by venturing into niche area of Pharma/gaming e-commerce. Future e-commerce will be for niche providers. i have not looked at its business model, funding source and needs, management etc so do not have any opinion on it.

      But if you have some study and convinced with the model, then can go for it. Although treat this as risky one.

    2. Thanks for your prompt reply.I went through your early blogs and found that you discovered various multibaggers like skm and avanti at much lower rates and quite earlier than others.I went through little bit of titan bio and it seems to be quite promising.Would it be fine to have a sip in it.?

    3. Titan Biotech is a very tricky situation just like any other small cap multibagger is once in its lifetime. You can buy a risky small cap at 30/- and it just roams near it for 3 years and then when it gives good performance it just blasts of to 300 in a year.

      First 3 years is a very tricky phase, i went through it in the case of SKM. You may look like a fool. So i am taking a staged exposure in it. I am buying in small at every significant moment like 2nd plant, modernization. i have bought some this year and now i'll buy when it will achieve some growth in its scale. This is the best way to invest in small emerging companies, you should not think of buying at lowest possible levels in one go. It should be in a staged and performance backed manner.

      For some natural reason, titan is not showing anticipated it is very risky right now...but it is not falling too. So take staged exposure but remember it is very risky...more than SKM.

    4. Dear Sir,Can you suggest few stocks for long term ?

    5. you can refer the blog for stocks like tata comm, Biocon etc Also UFO Moviez, Tata Chemicals, Piramal Enterprises, Specialty rest, Bajaj Electricals, HIL, Rallis India, Navneet Education etc.

      These are good high quality stocks for long term...dividend paying players, high quality management, strong balance sheet with no or low debt.

  5. Eagerly waiting for the next part of this...please update soon..thanks